Business and Development Sector Reports

Report of Expert Committee on Harnessing the India Post Network for Financial Inclusion

An expert inter-ministerial committee on financial inclusion has released a report titled Harnessing the India Post network for financial inclusion, which recommends structural changes in the operation of postal savings bank (POSB) accounts and asks the Department of Posts to create a wider technological platform, to take its low cost banking services to the rural unbanked population.india post financial inclusion

This report is a joint effort between Department of Post, Department of Financial Services, Department of Economic Affairs and Invest India Economic Foundation.

Download the report on India Post Network for Financial Inclusion at link below

Harnessing the India Post Network for Financial Inclusion – PDF -34 pages- 1MB

Executive Summary And Recommendations of the Report are given below


The India Post network with over 155,000 branches is twice as large as the outreach of all commercial banks in India put together. Over the years, the Post Office Savings Bank (POSB) has emerged as significant component of India Post operations and its revenues from financial services as a share of its total revenue have steadily increased over time to 45 percent today.

While the phrase ‘financial inclusion’ is relatively new, it is obvious that post offices were working on problems of financial inclusion many decades before the phrase was coined. The National Postal Policy also visualises an important continued role for India Post in delivering broad­based banking and financial services:

Nearly 16 crore people use India Post to save Rs. 3,23,781 crore as on March 31, 2007. Out of this, deposits in savings bank account alone is Rs.16,789 crore. There is, therefore, a need for India Post to computerize and connect all its savings bank accounts so as to widen and deepen the level of financial transactions and offer banking services to the rural population. India Post sees a great opportunity for increasing the number of accounts and volume of savings.”

This Expert Committee was constituted to examine potential synergies between the efforts at broad­based banking and financial services delivery at India Post and the larger policy goal of financial inclusion. The Expert Committee examined the role for the postal network in financial inclusion in the context of the presently unmet demand for financial services, the core strengths and capabilities of India Post, as well as of the emerging policy, regulatory and business environment in this area.

Based on extensive finance consumer research and consultations with key stakeholders, the Expert Committee is of the opinion that succeeding with universal access to financial services will require a considerable role for post offices. In parallel, and as some traditional functions of the postal network are being supplanted by new technologies such as email, India Post is also in the process of carving out a larger role for itself.

Therefore, there is a remarkable coincidence of needs between the twin problems of

(a) charting the The National Postal Policy: future for India Post, and

(b) resolving India’s challenges of financial inclusion.

The Recommendations of the Expert Committee are guided also by the role for the State in producing public goods and fostering public­private partnerships, and implementing vendor neutral and incentive compatible solutions. India Post will need a further expansion of its present financial services delivery strategy and capacity in order to perform public goods functions in the field of financial inclusion in an environment of modern technology. The Report sketches the contours of this strategy.

The primary building blocks of financial inclusion are storage of cash, payments and credit. Importantly, India Post already has several decades of experience in performing the first function through Post Office Savings Bank (POSB) accounts, and the second through money­orders. However, India Post does not yet deliver credit. This Report presents a unified approach and role for India Post in delivering these core elements of financial inclusion. It is feasible to harness broad­based banking and payments infrastructure in delivering a range of risk management tools including insurance, pension and credit, as well as a variety of government­to­person (G2P) payments targeted at the presently excluded population including the poor.

Access to banking services that permit citizens to receive and make payments in a secure environment is an important launch pad to financial inclusion. However, despite a prolonged attack on the problem, bank penetration rates around the country remain at only modest levels. India Post is well placed to actively assist universal banking coverage with a low cost, light­weight bank account for all excluded citizens. In an environment with rapidly evolving hardware and software solutions and a dynamic load requirement, India Post could achieve low costs, rapid implementation and technology risk minimisation through an outsourced model for delivering light­weight POSB accounts.

In this model, India Post could invite competing service providers to bid a cost (or revenue­share) per transaction based on the service providers’ assessment of the potential market size and growth, as well as the transaction price that the market will bear.

Recommendation 1: India Post should deliver lightweight, low­cost bank accounts to all Indian citizens and especially to the financially excluded population.

India Post can achieve this outcome by establishing contractual arrangements with multiple IT vendors who will provide an India Post specified application programming interface (API) and charge a stated low price per transaction (or deliver a stated revenue per transaction) to India Post. The underlying requirement for data centres, IT systems and operations management, and the potential for public­private partnerships in this area may be examined and implemented by India Post in the context of its overall banking and financial services delivery strategy.

The impact of this proposed effort upon the larger financial inclusion agenda of the Government can be further amplified by adopting an open architecture and by opening up interface to business partners such as micro finance institutions (MFIs), mutual fund and insurance companies, telecom operators and other entities desirous of also reaching and serving the excluded population including the urban and rural poor. In this way, while the India Post IT systems for light­weight bank accounts shall deliver financial inclusion through post offices, such partners can further the overall inclusion agenda by using the India Post IT infrastructure at a fee charged by India Post for transactions.

Recommendation 2: India Post should look for ways to leverage its low cost platform by providing India Post branded accounts to other strategic partners, such as MFIs, mutual fund and insurance companies, and telecom operators.

By treating its IT capacity for light­weight bank accounts as a public good, India Post would increase its impact on financial inclusion. Also, adoption of the POSB infrastructure by partners would lead to increased accounts and transaction volumes and induce further economies of scale.

The second fundamental building block of financial inclusion relates to payments. The dominant role of the ‘Postal Giro’ in Europe suggests that India Post, which already provides money­orders across the country, can play an important role in payments.

Recommendation 3: India Post should apply itself towards the challenge of achieving high volumes of money­orders where payments of as little as Rs.10 are achieved at a charge of less than Rs.0.1 while requiring no subsidy from the exchequer.

Drawing upon the experience with the Postal Giro, this will require a tight integration between POSB accounts and money­orders. The payments transaction will involve a transfer of an account balance from one POSB account to another, without any human intervention.

Recommendation 4: India Post should evolve the money­order to become a mechanism for transferring money from one POSB account to another, instead of just being a mechanism for delivering cash from one person to another.

Given the ubiquity of mobile phones in India today, there is growing recognition of the utility of mobile­based financial transactions in the Indian context. For example, a person with a POSB account should be able to use his mobile phone to make a real­time money­ order of Rs.10 to a street vendor if the street vendor also has a mobile phone and a POSB account. India Post should charge Rs.0.1 or less for this transaction.

A pan­India mobile­based and web­based payments system linked to POSB accounts can be equally used for remittances and can effectively replace the traditional postal money­ order. As with POSB accounts, the Expert Committee recommends an open architecture approach for payments under which India Post should sign contracts with all telecom operators. Similarly, all organisations that sign up to use the India Post IT infrastructure (for either offering POSB accounts or for offering their own accounts) should automatically be connected into this new money­order service of India Post.

Recommendation 5: India Post must build a payments infrastructure, through an array of contracts with partners, connecting up all POSB accounts and accounts of its partners, to effectively become a person­to­person money­order capability (through mobile phones or web browsers) for a large swathe of India.

Payments networks involve network externalities. The value of the platform which India Post is building is proportional to the square of the number of people participating in it. A network with twice as many people in it is thus four times as valuable.

Recommendation 6: India Post must elicit a large number of partners in terms of financial inclusion players, mobile service providers and innovative new technological choices in order to increase the size of the network.

This payments network integrally connects up with a key problem that government faces today: that of having a mechanism through which payments such as MGNREGS and IGNOAPS are directly delivered to citizens.

Recommendation 7: India Post must work closely with a diverse array of government agencies so that their G2P payments requirements are met through a combination of POSB accounts held by citizens and money­orders delivered by government to those POSB accounts. The Ministry of Finance should work with India Post in rapidly rolling out this platform and network, given its important implications for direct, targeted delivery of government subsidies.

The main body of the Report thus offers an integrated approach to POSB accounts and money­orders, and refashioning these to suit the financial inclusion needs of the 21st century. This is simultaneously of interest from India’s viewpoint – that of achieving financial inclusion and more efficiently running government programs – and also ensures that POSB accounts and money­orders are not made obsolete by technical and institutional change.

The Report also proposes a new model for delivering short dated non­ collateralised loans to the poor – an activity that is presently dominated by moneylenders. Recommendations on credit are based on some essential principles that should be applied. First, India Post must not give loans to individuals using public money. Second, India Post staff must exercise no discretionary judgement about the credit quality of a given individual who approaches a post office for a loan.

The Report presents a mechanism through which the India Post network can deliver short­ duration, fixed­size, non­collateralised micro loans (of Rs.500 for one month) while adhering to these two principles. To achieve this, identification of an individual should be done through the UIDAI. Each individual loan would be sourced from a network of competing lenders who would bid an interest rate for the loan on the basis of risk measures for an individual. The individual would obtain a loan at the lowest interest rate offered by competing lenders. The successful bidder for the loan would carry the credit risk on its books. The risk profile of the individual would reside in a database controlled by India Post. Individual credit history linked to a UID would create a repayment incentive for each individual. India Post would derive a fee by the lenders for performing these services.

With a combination of UIDs, mobile phones, payments infrastructure and POSB accounts, it should be feasible also to design a seamless process by which an individual is able to source an emergency loan at any point using a micro­ATM or a mobile phone.

Recommendation 8: India Post should play a role in the emergency credit aspect of financial inclusion, through a platform­building approach where private lenders deliver credit to the poor through a competitive framework.

Implementation of the recommendations of the Expert Committee would involve preparation of certain bid documents by India Post. These would cover the specifications of lightweight POSB accounts, mobile­based payments, and the credit­enabling framework. Once these documents are prepared, procurement can proceed.

Recommendation 9: India Post should request the addition of its financial inclusion project into the Terms of Reference of the recently announced Technology Advisory Group for Unique Projects, and the leadership team of the India Post financial inclusion project should closely engage in the work of this Group, so as to bring in the best practices for project management.

The 2010 budget speech envisaged an expert group, led by Mr. Nandan Nilekani, chairman of UIDAI, to examine implementation issues for complex IT projects in government. The terms of reference of this group focuses on the projects presently being implemented by

the Ministry of Finance: National Treasury Management Agency (NTMA), Goods and Services Tax (GST), New Pension System (NPS), Expenditure Information Network (EIN), Tax Information Network (TIN). The implementation challenges of these projects are identical to those that will be faced in activating post offices for financial inclusion.

Recommendation 10: The role of the Post Office Savings Bank as an agent of the Ministry of Finance should be revisited and expanded to enable India Post to play a larger, direct role in financial inclusion and build appropriate enabling architecture.

As per the current Allocation of Business Rules, the Government Savings Banks Act, 1873 is housed within the Ministry of Finance. India Post should engage with the Ministry of Finance to re­examine and expand its presently limited agency function to enable the

postal network to more serve effectively as India’s financial inclusion platform. This may require a significant change and expansion in the Allocation of Business Rules for India Post. Specific recommendations in this regard are beyond the scope this Expert Committee.

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