See you at the post office

India's postal system is a huge asset which is currently under-utilised, under-skilled and under-developed. The 150,000 post offices in a country of 640,000 villages (that's where the post office really matters) represent a reach unmatched by any other organisation.

If it is developed and used well, it can give a leg-up to those parts of the country and their denizens who have benefited the least from the high growth of the post-reform period.

Till not so long ago, post offices were relics of the past where the urban middle class would not venture unless absolutely necessary.

The burgeoning private courier companies appeared to be driving the last nail in the coffin of the slowly declining giant.

But then, just as hope always triumphs in India, the post office began to change. It gave itself a new logo, prominent urban post offices began giving themselves a new look and you could spot PCs across counters.

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The post office management is now getting bolder by the day and big brothers in the government have given it permission to spend Rs 2,000 crore (Rs 20 billion) in the next two years to bring in an IT revolution.

All post offices will be linked, a core banking solution will be installed and pre-paid cards will be introduced with which you will be able to send money from anywhere to any post office through your cellular phone.

All that the person at the other end will have to do to get instant credit is have a savings bank account with his post office.

For that last leg of the operation to be completed, the post office's savings bank operations will have to be transformed.

That can happen in only one way - by converting the financial services operations of the postal department into a proper bank, giving it a banking licence.

Banks have well defined procedures and processes, the skills needed to run them are standardised, as are the benchmarks by which they can be judged.

And you can easily get the public sector banks to lend a helping hand to enable the Post Bank of India to get going. Initially, PBI will be an outreach for the established banks, but over time it should be able to give vigorous competition.

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A parliamentary standing committee has again reiterated the demand for such a bank to be set up. And if or when (it is really a matter of time) it is, it will be a behemoth from day one.

In financial year 2008, postal savings bank schemes had total outstandings of Rs 340,000 crore (Rs 3.4 trillion), which was second only to the deposits of the State Bank of India that stood at Rs 540,000 crore (Rs 5.4 trillion). (ICICI Bank came third at Rs 240,000 crore (Rs 2.4 trillion) deposits.)

In the same year, postal mail traffic fell by 4 per cent. So did the number of money orders, by 8 per cent, but their total value went up by 7.8 per cent.

Simultaneously, the post office's 'business development activities', the cumbersome name for newer services like Speedpost, grew revenues by 24 per cent to almost a quarter of the department's total revenue.

So like it or not, the post office is changing. It only makes sense to get it to change the right way.

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Once the post office becomes a bank with a logistical arm and not the other way round, it will be able to bury the canard that it is a loss-making outfit. In 2008, the postal department's budgetary deficit was Rs 1,511 crore (Rs 15.11 billion).

If it were a bank with assets equal to the savings bank liabilities, it should have been able to earn a very modest return on assets of 0.5 per cent, which would have put it at the bottom of the public sector banks league table.

That works out to Rs 1,727 crore (Rs 17.27 billion), over Rs 200 crore (Rs 2 billion) more than the deficit. Right now it is the Government of India and the finance ministry that keep the postal department poor.

All the deposits go to the central exchequer, to be passed on to states as loans in proportion to their small savings. The department earns a fee to run the inefficient and archaic savings bank system.

Why is it necessary to reinvent the post office and improve the self-esteem of postal employees? The post office with its reach is the best placed to open bank accounts for the beneficiaries of the rural employment programme, recipients of government pensions and the like. The postman remains the best equipped to affirm a person's proof of residence.

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Once the banking function of the post office gets going and expands, it will give a boost to India's financial savings the same way bank nationalisation did and helped push up the national savings rate.

The whole scenario is predicated on PBI being run efficiently and on keeping its transaction costs low with the use of information technology and processes for handling no-frill accounts currently being evolved.

The big question is, what does PBI do with its deposits which are relatively costlier as postal rates are higher than banks'.

It should remain a narrow bank, eschewing retail and commercial lending and instead investing in secure but relatively high-yielding  bonds issued by infrastructure companies looking for longer term funds.

PBI could also subscribe to Nabard bonds whose proceeds Nabard could lend to microfinance organisations whose members could get paid through their savings bank accounts with PBI.

You have a bit of a virtuous cycle there. An efficient PBI will not only boost financial inclusion but help reduce fraud in social welfare payments. All this must be made to happen.