Last year, Kopila Thapa opened up a savings account in post office for her son studying in eighth standard in one of the government-funded schools of Darjeeling. She has been depositing Rs 500 every month. She delivers cow milk everyday to her customers’ doorstep, while her husband works in a nearby tea garden factory. Together, they earn a decent income to sustain the family of four. She has also been investing a recurring deposit of Rs2,000 every month with the post office small savings scheme whose maturity will end in 2022. She learnt about the prospects of small savings with post office from one of her customers.
Post office small savings schemes are popular among these depositors as it suits their risk-free and relatively high rate of interest earning needs. In fact, small savings account holders form a large part of depositors having per capita income of around Rs1.26 lakh. They seek for an absolute guarantee on their savings. According to the National Savings Institute, as on March 2018, the gross and net collections from such schemes were Rs5,96,402.31 crore and Rs1,58,180.43 crore.
There are currently 18 crore small savings account holders with India Post. Although the postal service is its main area of focus, it has been offering savings and deposits schemes since 1873 when there was no bank in India. It currently has 1,55,531 branches (versus 152,865 bank branches) spread across the country. Of these, 1,30,000 post offices are offering banking services in rural areas.
The vagaries in the market like slowing economy, falling GDP rate, rising inflation, unemployment, layoffs paint a stark future of living a decent life. Even savings with co-operative banks and non-banking financial companies are not risk-free. These entities have independent credit standing. Their cost of funding in institutional market is determined by their risk rating and hence some offer relatively higher deposit rates. These deposits in savings bank account, fixed deposits, recurring deposits are not risk-free. Nonetheless, the new insurance coverage, as announced in the Union Budget 2020, will now protect bank deposits upto Rs5 lakh.
Sovereign guarantee on depositors’ money is often cited as the post office’s unique selling point. Also small account holders, poor and uneducated people find dealing with post office somewhat easier.
Ashok Pal Singh, Member, Postal Services Board, GoI, says, “Everyone feels putting money with the sovereign is safe. Moreover, our customer base is increasing every year by 8 to 10 per cent. Some people migrate to the post office thinking that this is one institution that is not affected by the vagaries of the market, which is correct. The other reason could be that we do continue to offer a slightly higher rate of interest on most categories of accounts compared to others.”
Post office’s interest rates on deposits are not fixed. They are subject to quarterly review depending on the 10-year government bond yield. Being a small savings schemes provider, an individual can deposit up to a maximum of Rs4.5 lakh, including all joint accounts combined. Market watchers opine that one of the biggest drawbacks is its PPF scheme, which comes with a lock-in period of 15 years. Partial withdrawals from PPF are only allowed from the seventh year, that too once in a year. Similarly, premature closure is permitted after five years for treating life-threatening diseases and for pursuing higher education.
Chief Economist of Care Ratings, Madan Sabnavis, opines, “Everybody normally associates post office as being difficult to access. One always has an experience of inefficient functioning in a total bureaucratic manner. Also, incremental growth with the post office has been very limited. People put money and take it out. You don’t have the growth of 10-15 per cent, which we normally see in terms of bank deposits. In my opinion, recurring deposit is one of the most popular investment schemes offered by the post office.”
Amit More, founder and CEO of Finzy, a peer-to-peer lending solution argues, “If we were to compare the experience of visiting a branch of foreign or private sector bank versus our neighbourhood post office, obviously the former unquestionably wins. Then we need to ask ourselves the question of how many times a year do we really need to visit a physical bank branch. It’s a question of safe and better returns versus convenience.”
Unlike private bank account holders, post office account holders or small savings schemes had a reason to rejoice when the Ministry of Finance kept its interest rates unchanged for October and December quarter of FY 2019-20. In India, there are two banking systems, regulated by the RBI and all the banks and the other is the post office savings bank, which is regulated by a separate act of Parliament. A World Bank report released in April 2019 suggests the number of account holders in India was up from 53 per cent in 2014 to 80 per cent in 2017.
Although banking is not the core operation of India Post, it currently has 1,80,000 postmen equipped with an Android phone, conducting business on behalf of India Post Payments Bank (IPPB). These postmen offer aadhaar-enabled payment service (AePS), which allows account holders of any bank to deposit or withdraw their money. Although the IPPB is already running on Unified Payments Interface (UPI), the participation of post office in terms of online payments to merchants through debit card or UPI is yet to happen.
According to Singh, India Post application in this regard has been pending with the RBI. RBI regulates the functioning of UPI-based payments, an instant real-time payment system to transfer funds between two bank accounts, using smartphones. As per the figure released by the National Payments Corporation of India, UPI clocked 1.31 billion transactions with total valuation at Rs2.02 lakh crore in December 2019, from 1.22 billion transactions and Rs1.89 lakh crore valuation in November 2019. “We have been telling the RBI that it is important that these two systems (India Post and RBI) talk with each other, and provide interoperable services. We are technologically equipped to start debit card or UPI services.We are in conversation with RBI to facilitate our 18 crore active account holders with the benefit of banking and payment services. We are hopeful that this is going to be resolved shortly,” Singh says.
India Post runs the oldest insurance entity in the country much before LIC or others came into existence. It offers postal life insurance and rural postal life insurance, which are not governed by insurance regulator, IRDAI. The difference between these life insurances is that postal life insurance policy is sold only to salaried employees in urban areas, whereas rural life insurance can be sold to anyone, even among the urban population. India Post already allows the post office to act as a corporate agent of the mainstream life insurance companies. This means that the postmen can dispense the third-party life insurance and other insurance products provided it is not in conflict with its policies.
Singh says that India Post may have reservation in using its network and manpower for selling third-party endowment product.
Post Office Version 2.0
India Post is currently in the process of refreshing its overall technology, what it likes to call as Version 2.0. It has appointed consultancy firm, PricewaterhouseCoopers, to prepare a blueprint of its requirement to upgrade its technology for its postal service and banking requirements. With that, the establishment hopes to be adopting all necessary technologies. Its current version 1.0 was upgraded in 2010 , which is responsible for its banking operations — including mobile banking, internet banking, ATMs and AePS — along with postal life insurance and its core business of parcels and mails, while also managing its large physical network and employees.
On the other hand, the core banking system of India Post runs on an advanced version offered by Finacle, a core banking product developed by IT giant Infosys. “Talking about 2.0, first our existing maintenance contracts will be expiring and, second, a decade is as far you can take any technology. The 2.0 project is where we will renew or refresh all our contracts. First thing we will ensure is that all the stacks are up to date and at par with relevant offering available in the market,” Singh says.
Singh is optimistic that there will be more investment options available in the post office. He feels that infrastructure will create a push towards e-governance, e-commerce and financial inclusion in future.
“The post office is very well-suited to undertake financial education or digital education for people who are not proficient using online services. For both these reasons, it would be a good investment given that what we offer for public welfare,” he adds.
Experts are mostly of the opinion that India Post must focus to invest in innovating the experience at various customer touch points. The need of the hour is to be customer centric and be more visible to get a much larger share of the pie in terms of value.