India Goes Postal in Bid to Give Bank Accounts to the Masses

== India currently has more post offices than bank branches

== Deutsche Bank, Barclays want partnerships to reach rural areas

The world’s largest post office network is planning to ramp up its financial services across India, triggering a race among commercial banks to set up partnerships to reach remote areas that have been unprofitable.

India Post will start operations as a payments bank around December after receiving central bank approval last year, said M.S. Ramanujan, head of banking services at the country’s third-largest employer. About 90 percent of post offices are scattered across the country’s 600,000 villages, giving it a reach that no commercial bank can match.

“India Post certainly will be a game changer in financial inclusion," Abizer Diwanji, Mumbai-based leader for financial services at EY India, said by phone. "They are in the best position to multiply existing banking services."

Bringing the roughly 200 million Indians who lack a bank account into the financial system can help Prime Minister Narendra Modi lure much-needed savings and plug costly leakages in the government’s cash transfer programs. Central bank Governor Raghuram Rajan is betting that competition from India Post and others will push commercial banks to become more efficient and lower the cost of services.

Around the world, three of every four postal operators offer financial services to about 1 billion people, according to a November 2014 presentation from the Universal Postal Union. While India is decades behind nations such as Japan and Australia in allowing its post offices to perform banking services, the government has long used them for its small savings programs.

Barclays, Deutsche

Only 38 percent of bank branches are in rural areas due to the high cost of operations. As a payments bank, India Post would be able to offer almost any financial services except for extending loans.

The entity’s unparalleled reach has prompted more than a dozen firms -- including State Bank of India, Barclays Plc and Deutsche Bank AG -- to vie for partnerships. The postal department has yet to say when it will decide on potential tie-ups, or how they would work.

"In terms of number of accounts they could be pretty large in a short span of time," said K.V. Karthik, a partner at Deloitte Touche Tohmatsu India LLP, referring to India Post. It would however take time to gain critical mass in terms of amount of deposits, he said, without offering an estimate on the number of accounts.

Last Mile

India Post’s infrastructure would help it work with the government’s direct cash transfer programs and cover the last mile left over from Modi’s financial inclusion plan, Ramanujan said. The postal bank would also be free to set deposit rates that could be higher than the government-controlled rates on small savings offerings, he said.

“The government is looking to encash India Post’s staggering outreach and the huge trust factor that has been built over two centuries," Ramanujan said in an interview at his New Delhi office last month. India Post will need more than 8 billion rupees ($120 million) from Modi’s administration to invest in technology and human resources, he said.

Modi has opened about 200 million bank accounts under his financial inclusion program since August 2014, but a third of these have no cash. Ramanujan says more than 200 million people, or about 15 percent of India’s population, remain out of the network.

A panel formed by Modi in 2014 said India Post could have subsidiaries for services including banking, insurance products and delivery of government services. This would create 500,000 jobs in three to five years, it said.

One-Stop Shop

Expanding financial services would open a new chapter for India Post, an organization that traces its roots to the 1700s. The arrival of e-mail led to an erosion of revenues, leading to a deficit of 55 billion rupees in the year through March 2014.

The postal network can be leveraged to work with e-commerce companies, Ramanujan said. He pictures a system where a postman would collect cash from the recipient of the package -- a method used in as many as 80 percent of online purchases in India -- and use the payments bank to transfer the amount to the sellers.

India’s postal workers have also been roped in for various non-financial government programs, from supply of quinine for malaria control to selling contraceptives to poor families.

“The government envisages that the village post office becomes one-stop shop for everything a villager needs," said Ramanujan.

Despite its wide reach, India Post is mostly appealing to small deposit holders, according to Madan Sabnavis, Chief Economist at Credit Analysis & Research Ltd. in Mumbai.

“They have an advantage of wide reach but need to become more commercial in nature,” he said. “There will have to be a total change in the mindset.”