Can a Digitized Post Realize India’s Financial Inclusion Dreams?

A few months ago we traveled to the forested region of Mahbubnagar District, a hilly area in Andhra Pradesh, India. After getting off the eight-lane highway, we drove for another two hours along a narrow, windy road to reach this hillside community.  Ten years ago, this area was a “no-go zone”, controlled by Maoists. “Now no more,” we were told by a slightly edgy policeman. Yerrapenta is a picturesque village on a hill top, adjacent to a vast reservoir filled with rain water. Small tracts of land are divided between farmers on the sides of the hill. A daily bus that leaves in the morning and returns at 6 pm connects villagers, most of them from the Chenchu Tribe, across 2.5 miles of a windy road to the nearest market and from where they can find public transportation. During emergencies they need to walk at least 1.5 miles downhill to a nearby, bigger habitation, where they might find a ride. 
During the monsoon season, the only access road is often flooded, cutting off the village entirely. The 50-odd households make a living on small farms and in the harsh summer months they get work through India’s National Rural Employment Guarantee Scheme (NREGA). For any bank, microfinance institution, or branchless banking effort, reaching customers in these remote areas is an expensive proposition. The nearest provider is the post office, a mile away. In the case of financial services, or any service for that matter, this is the absolute last mile.
Branch Post Master distributing payments, Photo Credit: Quicksand
India’s postal network is the largest in the world with over 155,000 post offices, and about 140,000 of those are in rural areas; more than the total number of bank branches in the country. The postal service offers savings, mutual funds, life insurance, and domestic and international remittances through money orders.
However, several features of the postal service preclude it from being a bank. Accounts are not connected to the core banking server (CBS), making it a closed-loop system. Additionally, the post office does not offer credit. 
A giant effort is currently underway to digitize India’s postal network, which although seen by many as a little antiquated, is a trusted public institution in rural areas. Over 280 million deposit accounts that hold INR 2 trillion (about $34 billion) in savings underscore the confidence in the system. Recently, the postal department embarked on several technological solutions to modernize and create links to the core banking system, one of the largest digital projects in the world. 
India’s Post  has forged partnerships with the country’s leading technology companies to help build a technology platform that would allow post offices to offer online services, and postal workers to use mobile phones to handle many of their operations in the field. This year, it plans to launch a national ATM network, as well as connect all branches of the post office through the common technology platform.  
In another stride, the postal department is disbursing more than half of the NREGA payments electronically in the state of Andhra Pradesh, linking to the UID or “Aadhaardatabase. The rest are made through banks. As India moves towards digitizing its government payments across India, it will need the post’s vast network of branches and a reliable method of transporting cash on a regular basis, across mountains, forests, and civil war affected areas. Digitizing cash transfers is an opportunity for India to invest in a payments architecture that could increase transparency, reduce leakage, and achieve financial inclusion.
In December 2013, CGAP released a study on electronic cash transfers in Andhra Pradesh. NREGA in India assures 100 days of work to people living in rural areas at the minimum wage rate. Once work in the village is completed, receipts are issued to every worker for the amount of days worked. The mandal or sub-district office reports to the state office and generates “a funds transfer order”. In the district of Chittoor, a province of over 4 million people in the south of Andhra Pradesh, all NREGA and pensions payments are routed through a digitized postal system. The postal department has partnered with a private technology service provider, AP Online, to develop software that allows them to use the Aadhaar (UID) authentication system without being on the core banking server. This allows the government to monitor all payments in real time. 
The postal system relies on a network of “runners” for cash management, ensuring some liquidity for branch post masters and a storage vault for safekeeping. A branch post master is typically 50 years old, with about 10 years of experience. Our study revealed that even though postmasters spend 40% of their time delivering these payments, they are not paid extra for this new workload.   
Bank agent delivering G2P payments, Photo Credit: Quicksand
Customers still have to travel to the post office to receive their payments or to a location that might be at their nearest panchayat (local government) office. However, a recipient is able to transact at multiple branches, which increases flexibility. In locations where a branch post office is not present, the post office appoints agents that carry out the disbursements. 
In a report by the Reserve Bank of India’s (RBI) committee on financial services, every Indian should by 2016 have a functioning bank account, and an access point to a bank – this could be an ATM, an agent, a “kiosk” bank, or a full branch – within 15 minutes walking distance. The report also calls for differentiated or narrow bank licenses, and as a result, the post could potentially become a “payments bank”. That would allow a customer to remit money from her postal account directly to another postal or bank account instead of doing money orders; it would allow her to make small deposits, receive her government, or insurance benefits in the same account. Besides technology, the department would need to make several investments in training and incentivizing staff and would have an opportunity to develop and offer innovative products that cater to the rising aspirations of rural India.  
For the inhabitants of Yerrapenta and other rural areas, the post office could be the critical link to a formal bank account and other services that could improve their lives. A digitized post can take financial services to the last mile.       
*Note: As of June 2, 2014, the state of Andhra Pradesh has been bifurcated into two: Telengana and Seemandhra. Yerrapenta village and Mahbubnagar district now fall under Telengana.
Based out of New Delhi, Shweta S. Banerjee coordinates CGAP’s activities in India and leads its learning agenda on UID enabled digital cash transfers.  



14 June 2014 Submitted by Y P ISSAR (not verified)

The blog updates the case for India Post to be an effective instrument for financial inclusion after its digitisation through sympathetic eyes. As an ex banker, on feels that India Post is still far away from full filling the financial inclusion mandate. Firstly, the number of branches listed are not true but small part time presences in the rural areas, without any infrastructure worth the name. The IT initiative itself proposes to cover very small number of urban and semi urban branches with CBS. Secondly, the operations of post office are highly subsidised by the government every year thus it facing viability issues. Thirdly postal services is its core business where it is failing to compete with courier services, and where it will be called upon to concentrate more. Fourthly it requires corporatisation first if banking systems, procedures, risk mitigation competencies are to be developed. Fifthly,
its cash management capacities are poor. Sixthly, the aged manpower will soon face many challenges in computerisation itself, and converting them into bare foot bankers will be a big call to take. finally, let us give post office around five years to establish its CBS systems and procedure and only then revisit it to see if it is capable to carry the task of financial burden. The business correspondent model has already given us initially reach and let us protect from floundering which it will soon if not given necessary support.
Ex Chairman Sarv UP Gramin Bank Meerut UP, and
Ex General Manager (financial inclusion)
Punjab National Bank New Delhi

16 July 2014 Submitted by Shweta Banerjee (not verified)

Dear Mr Issar, thank you for your comment. I agree with you that there are several challenges before the post. However, digitizing and professionalizing will be of huge value to the millions of savers and users of the postal network. There is immense trust at the last mile in the post bank.

On the issue of public subsidy, most of India's banking sector is public. Priority sector lending is publicly funded. We need to get into the details of how it would cost the exchequer to digitize the post but am not sure it is a huge sum as compared to public funding for other financial sector objectives.

18 June 2014 Submitted by Anjan Mitra (not verified)

While India Post Bank may be able to ramp up deposit mobilisation and handle remittances, building up a lending portfolio with the present structure is going to be a Herculean task. Where it can contribute usefully is in mopping up rural savings and taking up the space that is today taken up by chit funds and dubious deposit mobilisation companies.
If it does get a license, it will probably: a) end up setting up a new institution altogether, b) some of the existing post office locations will be upgraded to bank branches c) deposit mobilisation will move to the new bank, d) shift some of the functions such as pension payments and Givt payments etc. into the bank. That will give it a deposit base and some income streams; however, lending activities from a financial inclusion perspective will take a while to build up.

16 July 2014 Submitted by Shweta Banerjee (not verified)

Anjan, thanks for your comment. Indeed, besides credit, the post already undertakes a lot of financial services. In a recent speech by the RBI governor, it was alluded that the post might get a "payments bank" liscense. Which means that it would do the same things, but link to a core banking server, and offer an account that could be operated from a bank or an ATM anywhere. That would empower a post customer hugely.

30 January 2015 Submitted by Shweta Banerjee (not verified)

Thanks Anjan,
You rightly point out the issues that will confront the Post as it evolves. Perhaps that is why the payment bank liscence, at least for a few years, might make more sense rather than a full fledged bank liscence.

20 July 2014 Submitted by ramanujan (not verified)

Every issue has it's pros and cons.But on balance it would do good for the country to modernise the Post and give them the task of leading the charge on Financialnclusion.FI as a social and economic agenda will have to be lead by multiple agencies such as the banks,Posts, telcos, MFIs, SHGs,e-seva and CSC facilities. Am ecosystem of collaboration and complementarity requires to set up and synergised and not exclude any agency on the grounds of capacity issues. It;s Financial Inclusion and begs for Inclusive effort by all concerned and not by just few.The post office has about 300 million accounts out of which 200 or so would be 'unbanked' in the sense of the depositors not having a bank account. Cannot the banks think of leveraging on these whopping ,millions to reach out to thses unbanked people?

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