Ideas & Updates

Can India Post rise up to the digital payments and financial inclusion challenge?

On 19 August 2015, the Reserve Bank of India approved licenses for eleven institutions to set up payment banks. The purpose was to have these banks further financial inclusion by providing small savings accounts and payment / remittance services to, “migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.”

The eleven entities include large conglomerates, non-bank financial institutions, and mobile network operators such as Airtel, Idea Cellular and Vodafone M-pesa Limited. Possibly the most humble name on this list is the Department of Posts, which operates under the name India Post. But India Post has the potential to become the single biggest force in the Indian government’s drive for financial inclusion.

Why India Post?

90% of India Post branches are in rural areas

India Post is the largest postal operator in the world, with about 155’000 branches, 90% of which are located in rural areas. In 2013-2014, India Post:

  • handled 349 million accounts, for a cumulated outstanding balance of more than USD 93 billion. (Comparatively the State Bank of India, the largest bank in the country, has total deposits of USD 130 billion);
  • Paid out USD 1.7 billion in MNREGA wages onto 64 million accounts on behalf of the Government of India.
20 million India Post provides life insurance coverage for over 20 million people

India Post has also provided life insurance to civil servants since 1884 and now also provides a Rural Postal Life Insurance scheme, with both schemes now covering more than 20 million people. These statistics illustrate India Post’s potential to reach rural populations as well as its technological and operational capability to handle volumes of transactions and money with a high degree of fidelity and safety – criteria used to screen applicants for the licenses.

In a sense, one could argue that India Post has already been operating as a payment bank, offering basic accounts, remittance/payment services, and even insurance, for more than a century. India Post is therefore already a key actor in the Indian financial inclusion landscape.

So what are the challenges?

Despite these achievements, India Post faces some technological and financial challenges. To screen the applicants, RBI deemed it important for banks to have “innovative technological solutions and a viable financial plan.” Unfortunately, India Post has not been profitable for several years in a row, and in 2013-2014 lost USD 825 million USD. However, India Post developed an ambitious plan in November 2012 to equip all its post offices with computer hardware, solar charging devices and network connectivity. To embrace these new technologies, almost 740 million USD was invested, however, much remains to be done. Ensuring that this IT modernization project is successfully completed and reduce costs will be a major challenge. Another one will be to train the staff in the 130’000 rural post offices to ensure they can adequately use this equipment and offer high quality financial services.

The business model that will be chosen could also determine the success of this initiative. India Post will now have to set up a new subsidiary and recruit new staff with banking experience to operate its payment bank. However, it appears that not all financial services will be handled by this new entity, which means that there could be a situation where the Post will need to maintain two systems in parallel, one for the “old” accounts remaining with India Post and one for the “new” accounts which will sit in the postal bank. It is not clear either whether these new financial services will be available through India Post’s entire network or only in a few selected post offices to begin with.

The plan is to launch the new payment bank in 2016-2017. It will be interesting to analyze the decisions that will be made in the coming months by the Department of Posts and the Ministry of Communications in terms of setting up the new entity. These decisions will determine whether the Indian Post Bank can significantly increase its already strong impact on digital payments and financial inclusion across India. We wish them every success!