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Indian Economy – Financial Inclusion and Inclusive Growth
In News: Prime Minister Narendra Modi on 1 September, 2018 launched the payments bank of Indian postal department.
What is Payments Bank: A payments bank is like any other bank, but it operates on a smaller scale without involving any credit risk.
Purpose: It will take banking to the doorstep of every citizen through an unmatched network of post offices and almost 3 lakh postmen and ‘Grameen Daak Sewaks’.
Why: Financial Inclusion still a challenge. The idea of financial inclusion, particularly in developing markets, has always met with challenges pertaining to accessibility and affordability. The RBI and the Government have tackled these challenges in numerous ways and have made substantial progress. But problems remain in reaching out to those who are most vulnerable, namely, the illiterate, low-income and rural population.
As of 2017, 37 per cent of the Indian adult population remain excluded from the formal financial system; 21 per cent of those included do not actively use their bank accounts.
According to World Bank’s FINDEX 2017 report, primary reasons why the unbanked chose not to transact through banks was:
They do not have enough money to start banking
The cost and distance from bank branches were an impediment
They do not have an account because a family member already has one
Lack of documentation and distrust in the financial system
Will it be beneficial both ways?
The existing familiarity with post offices could help them overcome the hesitation of going to bank branches and dealing with bank personnel.
If rural savings begin moving into the banking system, it will hasten the shift from physical assets such as real estate and gold to financial assets. Freeing the farmers and other residents of rural India from the clutches of moneylenders will be yet another positive.
Besides these, India Post, which has been recording losses due to high operational expenditure and falling revenue, will get a fresh lease of life. The real estate that is owned by India Post can be leveraged for a more sustainable revenue stream.
Salient Features:
India Post Payments Bank (IPPB) will be like any other bank but its operations will be on a smaller scale without involving any credit risk.
It will carry out most banking operations like accepting deposits but can’t advance loans or issue credit cards.
Offers three types of savings accounts—regular, digital and basic.
IPPB savings accounts are zero-balance accounts.
The freshly-minted payments bank will
Accept deposits of up to Rs 1 lakh – Open a post office savings account and link it with your IPPB account. Any balance in excess of Rs 1 lakh will be transferred to your post office account, which is a regular savings bank account.
Offer remittance services, mobile payments/transfers/purchases and
Offer other banking services like ATM/debit cards, net banking and third-party fund transfers.
The government owns 100 per cent in IPPB, which has been set up under the aegis of the Department of Posts, and will offer products and services through multiple channels such as counter services, micro ATMs, mobile banking app, messages and interactive voice response.
Is there a need to revamp India Post?
The creation of the India Post Payments Bank is a good step but there is a need to revamp Indian Post services if we want India Post Payments Bank (IPPB) to achieve its desired objective –
The number of post offices has come down. The employees on the rolls appears to be in line with the declining volume of business, which has come down by around 7 per cent.
The handling of the savings pie has increased. It consists of small savings that is contributed more by the middle-and lower-income groups with a strong rural bias. However, here too the compound growth rate of around 6.8 per cent is much lower than bank deposits which have grown at almost double the rate.
The losses of the department have increased by over nine times. The department has been running as an essential service which is primarily used by the weaker sections especially in the rural areas. As a result it becomes very difficult for the government to increase the postage rate given that it is uniform across the country.
The losses have been mounting as several costs like administration, maintenance, salary, etc. move with inflation while transportation costs keep moving up more than proportionately. Therefore, with the volume of each business coming down, these fixed costs increase the cost per unit of business.
The Way Forward:
There is considerable scope to leverage the present strengths of India Post to not just make it financially sustainable but also maximise the utilisation of the infrastructure to link it with other goals of the government to create a virtuous cycle. But there are reforms that should be implemented for better services –
The pricing structure has to be revamped as heavy losses cannot be sustained. Differential pricing based on location can be considered with the rural areas getting a subsidy. The other centres would have to be made to pay the full cost.
Post office spaces should be leveraged to earn rent. As financial inclusion includes non-banking products also, these can be sold in post offices by the mutual funds or their agents.
The existing staff can be trained to sell financial products like insurance and mutual funds in rural areas and a commission earned by the department.
The post offices can be integrated with the eNAM initiative where terminals can be kept in these offices for use by farmers. Further, dak sewaks can be used to also form a link with the agricultural markets (eNAM) as they have direct interface with farmers and can be given the responsibility of spreading awareness as well as be the link with the market prices.
Connecting the Dots:
IPPB has the potential to be a game-changer in financial inclusion. Discuss.
