The news that the Department of Posts has set out to try and start a bank is balm to this writer, who has been arguing for it for more than five years. The post office savings bank has huge deposits (totalling Rs 3.7 lakh crore at end-2009-10, nearly half of banking leader SBI’s) but also makes huge losses (net deficit 94 per cent of revenue in an exceptional pay commission award-burdened year, and 61 per cent in the more normal previous year, 2008-09). My logic was: give the operation the autonomy of a bank and encourage it to pay for itself.
Today there is more reason to make the change. After 20 years of reforms and miserable progress on the human development front, the powers that be are convinced that the fruits of growth have to be taken to those bypassed, mostly in villages. And the largest and most far-reaching network of the government is the postal set-up, with nearly 140,000 rural post offices and, aside from regular employees, 270,000 part-time, extra-departmental employees nicely named “grameen dak sewaks”.
Fortunately, the post office has been changing for several years now. It first got the strategy consultants McKinsey to work out a vision and road map towards reinvention, essential when the letter, the heart of the traditional post office, is rapidly disappearing. The department now has a new logo that signals that post office interiors have a new format, with prescribed appropriate furniture — and, critically, computers. It is on its way to connecting all “departmental” post offices through a core banking solution. (Getting all the rural branches hooked up will be an altogether different challenge.)
There are two reasons why the department has taken so long to try to change. One, leadership quality — it hardly gets its leaders from among those who top the civil service exams. Two, the Union finance ministry has had a vested interest in keeping the post office the way it has always been. Funds garnered by it are not its own. The exercise is done on behalf of the government, for a fee. The deposits have gone towards funding the fiscal deficit of the states and the Centre. Small savings account for 20 per cent of outstanding central liabilities. Within this, there is a lot of year-to-year variation. During 2000-11, the rate of growth of small savings has fluctuated between 22.2 per cent in 2004-05 and -1.4 per cent in 2008-09.
It can be said that the post office savings bank does not get depositors out of its own effort. They walk in because of better (administered) returns and tax advantages. That is why collections fluctuate according to whether banks’ deposit rates appear more or less attractive at a given moment. This happens because, while banks and the entire financial sector have moved to market-determined rates which fluctuate according to the signals of monetary policy, small savings rates have been kept stable so as to encourage steady savings by common folks.
That is why if the post office is allowed to own a bank, then all the outstandings under small savings (excluding those garnered by banks) may not remain with the new entity. Some will; only 16 per cent of postal deposits compete directly with banks. So an enormous amount of thought, structuring and effort will be needed to make the new entity a success and fulfil its developmental role.
The bank will have to become an efficient deposit taker and provider of basic financial services, like payments and remittances. For this it will have to take core banking to rural areas, where it is today scarce, and dot the countryside with ATMs. To increase footfalls and fulfil its true purpose of making itself and the post office of tomorrow the centre of rural activity, it will have to be the provider of last resort of e-governance services. The virtuous cycle will come when the typical rural employment guarantee labourer will get his payments through the post office bank — and then make it his piggy bank, the keeper of his small but precious savings.
The big issue will be what the bank will do with the savings it will hopefully generate. To begin with, it will have to remain a very narrow bank, parking its deposits in high-yielding long-term government securities, or infrastructure paper. A key option will be to park also with National Bank for Agriculture and Rural Development (Nabard), for on-lending to the microfinance sector. In fact, Nabard can float a special type of paper or certificate of deposit for the bank to park its funds profitably.
If the bank has to face a challenge greater than knowing what to do with its money, then it will be about human resources. It will be a stupendous challenge to run a rural bank with the latest IT and in an innovative manner. Truly outstanding leadership will be required to create the extended family to run this bank — not just public-private partnership, but something out of the box. Maybe invite social entrepreneurs like Nachiket Mor to take on a leadership role? This will not be easy, considering the trouble the prime minister has had to face to enable Nandan Nilekani to make a successful lateral entry. The postal bank must not, after all, become just another bank.