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Post offices, cooperative banks the next Amul success story in banking?

Gayatri Nayak, ET Bureau Oct 23, 2013, 04.00AM IST

Reserve Bank of India governor Raghuram Rajan is singing from the same hymn book as Prime Minister
Manmohan Singh when it comes to financial inclusion. But for those who have heard Indira Gandhi's
Garibi Hatao slogan and seen the bank nationalisation in 1969, it may just be old wine in new bottle.
Life has come full circle for Indian politicians and policy-makers. This time round they are not for
nationalising more banks, or forcing the existing ones to increase their lending to the poor.
Some of the mantras of Rajan include bank licences, larger role for foreign banks, specialised banks and
freedom for banks to open branches anywhere. A lot of these are aimed at taking financial services to
those millions who remain untouched by the nation's revolution in banking in the last four decades of
bank nationalisation, and two decades of aggressive private sector banking.
Building On Strengths
All these require new investments, creation of infrastructure, hiring of people and new capital. But
capital goes to places where it could make profits and not to rural India where it could end up being
charity. Policy-makers are fond of reinventing the wheel. Can Rajan be different?
When there are nearly 96,000 co-operative banks spread over thousands of villages and post offices
located in 2.38 lakh panchayats, is there a need for a fresh set of institutions to harness the savings of
people in rural India? This may be the turn of financial services to have its own Amul, the milk co-
operative that has delivered prosperity to millions of rural folk, and proved that it could still be a
business model.
"The co-operative banks have good distribution in the interiors," says Aditya Puri, chief executive at
HDFC Bank. "I think these are institutions with a lot of strength. They have some weaknesses. If we can
build on their strengths we will reach the interiors of the country faster."
Co-operative banks have catered to more people than private ones which for the first time came into
vogue more than 100 years ago influenced by the co-operative movement in the West. In India, they
came into existence mostly through local community initiatives.
Over time these institutions degenerated into fiefdoms of local politicians who abused and misused the
structure exploiting the ignorance of people. These were compounded by a poor regulatory structure
where both the RBI and state governments have jurisdictions. The case of Madhavpura Co-operative
Bank is still fresh in mind where stock broker Ketan Parekh borrowed from it to fund stock positions
worth hundreds of crores.
"These banks have come to grief because of their poor governance, poor lending practices, and the bad
loans they are saddled with, and not because of providing a very important deposit facility to the poor
people," says Prakash Bakshi, former chairman of the National Bank for Agriculture and Rural
Development (Nabard). "They are providing a human service for financial inclusion as the poor don't just
need loans. They also need a safer place to keep their deposits."
Working Out the Details
But the idea of getting co-operative banks
converted into full-fledged banks does not
seem to have escaped Rajan. On the very first
day of taking charge he spoke about "the
possibility of converting large urban co-
operative banks into commercial banks." "We
will pursue these creative ideas of the RBI staff
and come up with a detailed roadmap of the
necessary reforms and regulations for freeing
entry and making the licensing process more
A 13-member committee under its board
member and former ICICI Bank executive
director Nachiket Mor, along with Vikram
Pandit, former Citigroup head and Axis Bank
chief Shikha Sharma will work out the details.
"Co-operative banks are now more aware
about their need to be financially sound for
their survival," says Shrinivas Joshi, managing
director, Shamrao Vithal Co-operative Bank.
"As for urban co-operative banks, with the
appointment of two independent directors on
the board, the balance sheets are more
transparent now. ''
It is not clear how much the committee could
work or provide a framework to make co-
operative banks relevant. The question is: will
the framework involve a focus on technology,
or will it be a new push towards micro finance
which showed promise, but floundered when
private capital led to its eventual collapse by
abusing the system?
Co-operative banks could be converted with
some tight regulations that would help
mobilise savings, and at the same time, make
them safe.
"These could be structured as investment
banks," says Bakshi of Nabard. "Take the
money and put it in CRR and SLR and your
deposits are safe. These troubled banks can be
converted into savings banks. They can be
prohibited from lending, but continue to accept small deposits.
But the view of the rural India from Nariman Point and Manhattan could mostly be unrealistic. The
needs of the population are best understood by those on the ground, but could be delivered better by
those with understanding of finance. "These are people who will not dare to go to a new-generation
bank," says Bakshi.
Safety & Security
For the rural folk whose income is meagre, the importance of safety precedes any other criteria. What
better than a government department such as the post office which reaches 150,000 villages and will
also be trusted!
The most comforting factor could well be that they see the postman and post master every day and that
they are government employees, unlike business correspondents who are perceived to be risky.
The success of post office as a savings vehicle is best illustrated in Japan which is the world's biggest
owner of retail savings at more than $3 trillion in savings and insurance policies. Of course, the
institution is being reformed for better performance time and again. But that cannot be an argument to
stall the India Post efforts to run a bank just because its best years are supposedly behind it.
India Post, which has sought to open an account, already provides savings facilities, with many rural
Indians preferring it to over even banks. It has deposits worth 3.7 lakh crore.
While a direct comparison with Japan Post Holdings may be a bit far-fetched, India Post may have to put
in place the infrastructure if it has to be half as successful as its Japan counterpart.
"The issue will be how will it leverage its resources,'' asks Saurabh Tripathi, partner and director at
consulting firm Boston Consulting Group. "It is a huge institutional challenge. But if done well (execution
of its business model), then they can play a big role in financial inclusion." The excitement about
telephone companies delivering financial inclusion is waning given that there is distrust between banks
and the firms which provide last mile connectivity.
While businesses such as telecom, or retailers such as Hindustan Unilever, or Britannia playing the role
of a financial intermediary may sound feasible, practical issues could stall them.
While safety and security are the primary determinants of someone keeping money with an institution,
co-operative banks and post offices appear better placed to perform the inclusive function than any
other institution. "It is political interference," says HDFC Bank's Puri. "Once they can solve that, it will be
better. Their managements are fine. They have a good business. They have some issues in terms of
ownership and corporate governance. And I think they can be fixed."
Question: Is it a good idea to let post offices run as banks?