India Post is a fascinating organisation. It is effective, efficient, has phenomenal reach and boasts of a tradition of distributing financial products from 1882. It is best in terms of know-your-customer and sits on voluminous data. It needs functional autonomy and its staff more incentivised pay and perks. If India leverages the strength of its postal system, it can serve the people better and make some profits.

The savings rate of the economy has improved significantly compared to the last decade. Gross Domestic Savings (GDS) last fiscal was 28.9 per cent of the Gross Domestic Product (GDP). Within GDS the largest contribution — more than 85 per cent — comes from households, the other contributors being the government and private corporate sector. One of the largest contributors to the financial savings of households is postal small savings.

The share of these small savings has more than tripled since 1980-81. While some of this growth can be attributed to the administered interest rates and the tax incentives associated with the small-savings schemes, due credit must be given to India Post for mobilising such large amounts across the country. Needless to add, India Post’s extensive branch network across the country has facilitated this rapid growth.

The financial services of India Post are administered by two major entities — Postal Life Insurance Directorate (PLI) and Financial Services Division (FSD). The PLI Directorate deals with PLI and Rural PLI products, while the FSD deals with all the other financial services. India Post offers the following financial services:

Post-Office Savings Bank (POSB) services

Postal Life Insurance services-Postal Life Insurance (PLI) and Rural Postal Life Insurance (RPLI)

Pension payments to employees of post, telecom, coal-miners and railways.

Money orders and postal orders

New financial services, such as international money transfers with Western Union, distribution of mutual funds, distribution of government securities, electronic funds transfer, warrant payment and others.

Table 1 shows the contribution of these financial services to India Post’s overall revenues. It is interesting that there is an increase in the revenues coming to India Post from the financial services even as its mail volumes have been continuously falling. In our estimate, this scenario is going to get more skewed towards the financial services in the coming years. Therefore, India Post needs to manage its financial services far more profitably than its other operations.

Retail new services

India Post provides savings bank services on behalf of the Ministry of Finance (MoF) and is remunerated on a cost basis as per a formula agreed with the Ministry. The remuneration received by India Post from the Finance Ministry for POSB (Post-Office Savings Bank) over the years is about 40 per cent of its revenues and yet India Post does not make much profit out of this service.

Moreover it does not even enjoy float on the annual POSB collections. Therefore it makes sense for India Post to retail those new services which provide profits; however, till the new services reach critical mass, India Post will need to provide POSB services, otherwise its deficit would widen further.

It is in the new financial services that India Post generates profits as it provides these in partnership with the private sector on a cost-plus basis. A case in point is that of India Post’s International Money Transfer Service, provided in association with Western Union. The service ensures instantaneous availability of money sent from more than 190 countries to recipients in India. It is a cash-to-cash service at both ends, and is regulated by the Reserve Bank of India.

Although such services were already available to Internet and bank users, India Post filled in the gap for places without banks and for customers without the Internet. The service found rapid acceptance even in remote areas such as Leh, Lakshadweep and Andaman and Nicobar Islands. It is currently being offered from more than 6,800 post-offices. India Post’s revenues from the service have grown from Rs 180 lakh in 2002-2003 to Rs 700 lakh in 2004-05.

However, the service makes no significant impact on the India Post balance-sheet considering that its deficit in 2004-05 was Rs 138 crore.

Similarly, other new services, such as distribution of mutual funds in partnership with UTI AMC, SBI Mutual Fund and PruICICI Mutual Fund as well as distribution of pension products of ICICI-Prudential life insurance and the non-life insurance products of Oriental Insurance are yet to reach critical mass to make a positive difference to the India Post balance-sheet.

Geographical reach

India Post operates the largest postal network in the world, comprising 1,55,516 post-offices, of which 89 per cent are in the rural areas (Annual Report 2005-06, page 9). Even the smallest branches in remote areas provide financial services such as banking and money-orders. The geographical reach of India Post is unparalleled in the country; it has more than double the number of branches of all the banks in the country put together. On an average, in 2004, a post-office in India served an area of 21.13 sq. km and a population of 6,585.

At the end of 2004, the US had 37,159 post-offices, France 16,947, Australia 3,844, the UK 14,609, Japan 24,678 and China had 66,393. Table 2 shows the comparison with some countries on the number of people served per post-office.

The implications of the above numbers for financial service providers in our country are interesting. None of the players in banking, insurance or mutual funds has such a large network as India Post and the thrust for banks in recent years has been towards consolidation rather than expansion. To grow their businesses, therefore, a partnership with India Post seems logical.

Even after the reduction the in number of employees this coverage is phenomenal compared to other countries. India Post is next only to the Indian Railways in terms of number of employees. As on March 31, 2005 it had 5,40,334 employees, of whom 2,46,678 were departmental employees (45.65 per cent) and 2,93,656 (54.35 per cent) were Gramin Dak Sevaks, who provide the village postal services as franchisees of India Post (Annual Report 2005-2006; Table 17).

In the last 20 years, despite an increase in the number of post-offices, the postal system’s manpower has fallen from 0.61 million employees in 1985 to 0.54 million in 2005 — 11 per cent less (Department of Posts; Book of Information, 2002-2003).

Know-Your-Customer

The strengths of India Post are its long tradition of handling financial services (from 1882) and its credibility and trust. It reaches the bottom of the pyramid with a minimum savings bank account of Rs 20, with more than 137,000 branches providing these services in the rural areas. Of course, Know-Your-Customer is one of the major strengths of India Post. Its vast army of postmen can be used by various service providers for verification of the customer’s residential address. India Post has already announced its decision to verify the addresses of customers of mobile phone companies and there exists a good business opportunity for it in this area.

Contemporary banking — driven by the forces of globalisation, IT-driven products and services and rising customer expectations — is becoming increasingly impersonal. The emphasis is on reducing costs and improving productivity. Major banks have closed down a number of branches in recent years on commercial considerations.

In cities, there are mechanisms to dissuade the customers from coming to branches and incentives to use such devices as ATMs. This trend is increasingly resulting in the service-providers losing out on knowing their customer’s preferences.

India Post, on the other hand, will have the advantage of personal banking when it takes on its competitors. It should think of FinMarts, or even a Postbank, to meet the requirements of the customers on the margin. It can gear itself to mass markets when others are doing the cherry-picking. It need not take credit risk as of now but distribute and collect and even act as a channel for micro-finance institutions. For these initiatives the Government needs to allow India Post more autonomy and flexibility. (For instance, can India Post recruit management graduates?)

The long-term viable strategy for India Post with regard to financial services, therefore, seems to be to synergise its own strengths of the countrywide distribution network with the financial expertise of private partners and provide its customers modern financial services while generating substantial profits for itself.