Towards financial inclusion: The post office of India as a financial institution,1880

Abstract

The Post Office of India has evolved tremendously from an institution of ‘communication’ to an important ‘financial’ institution of the early twenty-first century. This article traces the evolution of two key mass financial services offered by the Post Office over the past 130 years—money orders that have primarily served as a mechanism for internal and international migrants’ remittances and the small savings system that has mobilised deposits from millions of rural and urban citizens. It assesses the contribution of the Post Office in enhancing ‘financial inclusion’ in the twentieth century and argues that the financial history of modern India remains incomplete without integrating the Post Office—currently the largest bank in India in terms of network, accounts and personal deposits—as a key institutional actor in the narrative.

Keywords

Post Office financial inclusion small savings migration remittances banks

The Post Office of India has evolved from an institution of ‘communication’ in the nineteenth and twentieth centuries to an important ‘financial’ institution of the early twenty-first century. In 2013, India Post (the new name of the Post Office of India) generated 60 per cent of its revenues from financial services offered through the largest postal network in the world consisting of over 154,000 offices, 90 per cent of which were located in rural areas.¹ Faced with stiff competition from electronic communication technologies that challenge ordinary mail services, India Post followed the global trend of postal institutions re-positioning themselves as financial institutions and approached the Reserve Bank of India for a banking licence that would enable it to offer more financial services.²

To understand this dramatic change in functionality of an institution identified with its traditional role of delivering letters and parcels requires an understanding of postal and financial history and above all migration history. This is because the Post Office has been the most important financial institution for millions of migrant workers over the past century. The 7 billion postal money orders (MOs) issued over 130 years since 1880 largely represent the remittances sent by migrants in India and overseas to their families back home.³ The word ‘money order’ is no longer just a noun, it is an adjective used to describe economies heavily dependent on migrants’ remittances.

While the Post Office has, as this article argues, played an important role in enhancing financial inclusion and development in modern India, this contribution is surprisingly unknown or unacknowledged. This is because the literature on the financial history of modern India has largely focused on lenders, such as, commercial banks and moneylenders.⁴ As the Post Office’s financial history deals with remitters and depositors rather than lenders, it easily escapes notice in conventional narratives of financial history. For a more complete understanding of financial history, it is therefore important to understand the history of postal financial services, as the Post Office has emerged today as India’s largest bank in terms of network, accounts and personal deposits.⁵ It also offers remittance services, especially to migrant workers, although it does not command the glory that it once did in this business in the early twentieth century.

This article traces the evolution of these key postal financial services—MOs and small savings—over the past 130 years.⁶ In writing a history of the Post Office as a financial institution, this article serves three purposes. First, it highlights the role played by the Indian Post Office in fostering financial inclusion in the twentieth century. Second, the discussion on MOs provides the first history of internal and international migrants’ remittances in modern India. Finally, it illustrates how a banking habit was cultivated among the unbanked rural masses of the subcontinent. Thus, it argues that the financial history of modern India remains incomplete without integrating the Post Office as a key institutional actor in the narrative.

The article primarily draws its information from more than 130 annual reports published by the postal department in the past century and a half.⁷ This is supplemented by archival records of the postal department, studies on migration that have documented aspects of migrants’ remittances and the broader literature on postal and financial history.

The article begins by documenting the rise and decline of the postal MO service, its unique features and innovations and its relationship with the aggregate economy. This is followed by a section on the postal savings bank with a description of the system, its development over a century and the reasons behind its stunning rise in the post-independence period. The final section contributes to contemporary debates on financial inclusion by integrating the financial history of the Post Office in the narrative.

The Rise and Decline of the Postal Money Order Remittance Service

Origins

The MO system came into existence as a response to the growing theft of letters containing money in the late eighteenth-century Britain. Between 1792 and 1838, the system was run as a private business by enterprising clerks working within the premises of the General Post Office in London under the name ‘Stow & Co.’⁸ The rising popularity and profitability of the business raised suspicions about the nature of the business and it was taken over by the Post Office in 1838. This was the first foray of the British Post Office in financial services or for that matter in a business other than that of delivering correspondence.⁹

The postal MO business grew even more rapidly thereafter due to Rowland Hill’s penny postage reforms, lower transaction costs and the development of the railways. The success of the British MO business, catering mainly to domestic commercial transactions, encouraged its rapid adoption in other Post Offices of the world. In 1855, it was adopted by Canada and in 1864 by the United States under the Lincoln administration to ‘promote public convenience, and to ensure greater security in the transfer of money though the United States mails’.¹⁰ Taking cue, private firms in the US engaged in the communications, and logistics sector also started their own MO operations. Western Union, currently the world’s leading money transfer operator, introduced the money transfer business in 1871, based on its telegraph network. American Express, until then a logistics company, introduced the MO business in 1882, marking its first foray into financial services.¹¹ European countries and their colonies also adopted the system such that by the end of the nineteenth century, the domestic MO was an important financial service provided by some businesses and most Post Offices around the world.

The international MO system arose along with the popularity of the domestic MO system to meet the surging demand for remittance services in the ‘age of mass migration’, beginning in the mid-nineteenth century. In 1859, Britain and Canada established an MO convention to facilitate migrants’ remittances that were previously being offered only by private firms.¹² In the next decades, several conventions among other countries and colonies were established. The international MO system gained an impetus with the establishment of the Universal Postal Union by the Treaty of Berne in 1874 and the subsequent rationalisation of transaction costs. By the end of the nineteenth century, most postal establishments in the world had signed MO conventions with each other. These conventions formed the backbone of the international postal MO system that was instrumental in facilitating large volumes of migrants’ remittances across the world.¹³

The MO system was adopted in British India in the 1860s, not by the Post Office, but by government treasuries located in district headquarters as a means for remitting money between districts and provinces.¹⁴ The system largely catered to government undertakings and was out of reach for the public. A proposal was made in 1866 to transfer the service to the Indian Post Office, but was rejected.¹⁵

With the emergence of the international MO system, MO arrangements with Britain in 1873 and Germany, Holland and Switzerland in 1876 were made through the oversight of the British Post Office.¹⁶ MO services for seamen were also introduced in 1876.¹⁷ As the demand for MO services grew, the 300 odd treasuries were found to be ill equipped to conduct the business. The Indian Post Office, in contrast, had more than 4,000 offices and provided convenient office hours to the public.¹⁸ It also had international exposure through its induction in the Universal Postal Union in 1876. Eventually, the Indian Post Office took over the MO business from the government treasuries on 1 January 1880, four decades after its establishment in the British Post Office, and remittance facilities were extended to the interiors of districts.

System and Innovations

Remittances or money transfer services and instruments, such as, hundis, have long been noted in India’s financial history but these services have usually been discussed in the context of merchant communities.¹⁹ For the public, self-carry, remittances through friends and relatives and remittances through the general mail would have been the norm for money transfers in the pre-MO period.²⁰ Not surprisingly, the postal MO filled an important need of millions of people in India and overseas who wished a cheap, safe and reliable means of transmitting small sums of money.

In the original MO system, the payer would visit the Post Office and fill out an MO form with the details of the payer and payee and hand over the amount to be remitted along with a commission fee. The Post Office would issue an MO certificate to the payer who would then send it to the payee. The Post Office at the payer’s end would send an MO advice with all the details to the Post Office at the payee’s end. The payee would go to the Post Office, show the MO certificate with some proof of identification and receive the money on a correct match with the MO advice. This was the system in Britain and the United States in the late nineteenth century, and it generally continues to form the basis of operations of private firms, such as, Western Union today.

This was also the system initially adopted in India, but several innovations were carried out in the first two decades of MO operations that altered the system to better serve local needs. A major change in the MO system took place with effect from 1 October 1884, when the Post Office radically altered its delivery procedure. Taking a cue from the German postal system, the Indian Post Office eliminated the need for separate communication between the remitter and payee as well as the need for recipients to visit the Post Office to encash the MO.²¹ The new service provided ‘home delivery’ of cash and was created to enable faster closure of accounts, reduce cash accumulation and lessen the need for the personal attendance of women at the Post Office.²² The last point underscores the gender norms that existed in the late nineteenth century as well as the fact that MO recipients were mostly women or wives of migrant men who were away on work.²³

The home delivery system gave an additional halo to the postman, especially in rural areas as he (rarely she) would bring not only communication but also money to the doorstep. The ‘magic of the money order’ was evident in the early twentieth-century Eastern Uttar Pradesh, a major labour-exporting region, where the position of the postman was elevated to a ‘position just below the policeman’s’ and where he could exact ‘a high price of undoing the straps of his money-order bag’.²⁴

The system did have its drawbacks for it laid additional responsibility and temptation on the postman who delivered the cash. If the postman had to pay MOs at a sahib’s home, there would be a ‘long and tedious wait’ before the signed receipts were brought back.²⁵ At important pilgrimage centres, it would be impossible for postmen to locate and identify the payees.²⁶ It led to the opportunity for blackmail and in some cases outright fraud as a postman in Calcutta was caught running Ponzi schemes using money from his MO bag.²⁷ In areas with communal tension, as in one case near Rawalpindi, postmen were known not to deliver the cash to certain houses leading to proxy recipient addresses on MO forms.²⁸ Nevertheless, the fact that the system has persisted till date suggests that the convenience provided by this system has far outweighed the costs.²⁹

As the MO system was largely used by poorer sections of the society, it also had to confront the problem of widespread illiteracy. This generated a class of professional letter writers who would assist remitters in filling up an MO form (for two pice).³⁰ At the recipient’s end, from 1896, the Post Office started taking thumbprints of payees on MOs as marks of acknowledgment for the remitter.³¹ The acknowledgement slip would be sent back to the remitter and was later dubbed as a ‘magic slip of paper’ that for the first time served as an ‘indisputable proof of payment’ for labourers.³²

The MO system could handle redirection of MOs, alteration of addresses or places of payment, alteration of payee names, stoppage of payments and refunds of MOs in case of non-payment.³³ The procedure for international or foreign MOs was broadly similar to that of inland or domestic MOs with the added complication of dealing with arbitrage opportunities arising from shifting exchange rates.³⁴

Further innovations led to new types of MOs apart from the domestic and foreign MOs. The telegraphic MO (TMO) was launched in 1884, five years before its launch in Britain, to enable quicker transmission of money and improve services in remote areas.³⁵ This was a crucial means of money transfer between South India and Burma which otherwise had infrequent postal communication in the late nineteenth century.³⁶ A ‘revenue MO’ was also launched in 1884 in the North Western Provinces, on the recommendation of the first Indian appointed Postmaster General Rai Bahadur Salig Ram, and this enabled land revenue payments to district treasuries.³⁷ This was later adopted in several provinces, sustained in Northern India but failed in Madras Presidency as it was found that the ryots there could pay revenue through the village headmen.³⁸ A ‘rent MO’ was introduced in 1886 for tenants to pay rents to landlords and quickly earned the reputation for being the best mechanism of payment as it bypassed direct contact with landlords and the payment of the customary nazarana.³⁹

All these postal innovations in the late nineteenth century caught the attention of observers elsewhere as many of them were being implemented for the first time in the world and on a large scale. An article in the London Times (reprinted in the New York Times) in 1898 pointed out the ‘originality and vigour’ of the Indian postal department and observed that:⁴⁰

The sepoy on active service, the coolie from distant provinces on the Assam tea gardens, and the domestic servant following his master’s fortunes over the length and breadth of India, are as sure that their monthly wages will punctually reach their remote homes as if they paid over the money with their own hands.

Postal officials in India were also well aware of the importance of the MO system. The Post Office manual of 1908 noted that ‘no branch of postal work commands a wider popularity than the money order system’ and that it was imperative to address complaints as quickly and efficiently as possible.⁴¹ The MO system remained broadly unchanged across the twentieth century with only periodical changes made in MO size limits and commission fees (discussed further in the next section). Some new types of MOs have emerged, such as, Service MOs that remit money to postal employees, Family Allotment MOs for defence personnel and Value Payable or VP MOs that accompany VP articles. In 2006, the instant MO or iMO was launched, an online platform that uses the old system of separate communication between payer and payee. In 2008, a different type of MO, the electronic MO, was introduced as a modern version of the TMO that ensures same-day delivery of money to the payee. The ordinary MO, however, continues to be the lynchpin of the remittance system, though its significance as a means for migrants’ remittances has waned considerably in the last five decades.

Development of Domestic Money Order Business, 1880–2010

In the period 1880–81, the first full year of postal MO operations, the number of domestic MO issues increased nearly fivefold to 1.6 million amounting to ₹ 45 million.⁴² The Post Office commented that a ‘trivial loss’ was made in ‘suddenly throwing a novel and heavy pecuniary responsibility’ on the postal officials.⁴³

Postal innovations over the next two decades had a significant impact as the postal MO business grew at almost 20 per cent a year in the first decade after its launch and a brisk 5 per cent in the next two decades. By 1910, 23 million domestic MOs amounting to over ₹ 370 million were annually issued by the Indian Post Office.⁴⁴ This figure was around 2 per cent of India’s gross domestic product (GDP) reflecting a fairly sizable volume of transactions.⁴⁵ All through, the average value of the MO issued steadily fell from ₹ 28 to ₹ 17 as the service was used ‘more and more [by] the poorer classes’ whose individual remittances were small.⁴⁶ The popularity of the MO system led to demands for its adoption in most native states of India.⁴⁷

The domestic MO was quickly associated with migrants’ remittances as a ‘large proportion of the business consisted of remittances by native soldiers, constables and labourers’.⁴⁸ Revenue and rent MOs never exceeded 6 per cent of total domestic MO issues, and while ordinary MOs did serve commercial purposes, notably in Calcutta, for the greater part they served migrant workers.

In a short period, domestic MOs sourced from the principal labour-importing centres, such as, Assam, Calcutta, Berar and Bombay city, were pouring into prominent labour-exporting regions, such as, Eastern Uttar Pradesh, Bihar, coastal Orissa and the Konkan and Malabar.

The number of orders paid was largely in excess of the number issued in the North Western Provinces, Behar and Oudh regions of North India ‘which [had] a large emigrant population’,⁴⁹ and this feature was maintained throughout the twentieth century.⁵⁰ In the period 1913–14, the postal circle of Eastern Bengal and Assam issued MOs amounting to ₹ 79 million and paid MOs worth only ₹ 50 million within the region. The balance of roughly ₹ 29 million would have crossed over to the source regions mentioned earlier.⁵¹ The central postal circle covering the central provinces was also a net remitter to other states by a margin of around ₹ 2 million. In coastal Orissa, MO remittances were a lifeline for dependents of migrant workers and increased substantially during famines of the early twentieth century.⁵² The Portuguese settlements were net recipients of remittances, mainly from Bombay Presidency, due to the ‘large class of Goanese who [were] in employment in British India, chiefly as domestic servants’.⁵³ In Bombay city in the 1930s, ‘the practice of sending money orders had proved to be so disruptive’ due to breaks taken from work, that the Bombay Mill Owners Association approached the postal authorities to arrange for remittance services directly from the mill premises.⁵⁴

Migrants’ remittances through postal MOs were so widely used that MO statistics were routinely mentioned in the early twentieth-century provincial census reports in the chapters on migration.⁵⁵ For instance, in a detailed description of district-level MO statistics, the census of Rajputana (present-day Rajasthan) in 1921 noted that⁵⁶

In Ajmer-Merwara, immigrants exceed emigrants and are mostly employed in the Railway Workshops and offices and remit their savings to their families abroad. In the year 1918–19, payment exceeded issues due to receipt of family allowances from persons in Military Service during the Great War.

In the province of Bihar and Orissa, there was a robust relationship between outmigration and MO receiving intensities.

Figure 1 shows the strong positive relationship between male-dominated outmigration (as proxied by the sex ratio⁵⁷) and MO remittance-receiving intensity (as proxied by the monthly MOs paid/household ratio⁵⁸) at the district level in Bihar and Orissa. Districts, such as, Cuttack, Balasore and Puri in Orissa and Saran in Bihar, are well known in the historical migration literature to have been heavily dependent on postal MO remittances.⁵⁹

This close connection between migrants’ remittances and MOs led to a sizable business for the postal department in the early twentieth century. Figure 2 tracks the evolution of the domestic MO/GDP ratio over the twentieth century and shows that this ratio was roughly between 2 and 3 per cent between 1900 and the mid-1960s.

Figure 1

Source: GoI, Census of India, Vol. VII, Bihar and Orissa, Part 1, 1921, p. 107 for data on MOs and Part 2 for information on population and occupied houses.

Figure 2

Source: Various Annual Reports of the Indian Post Office; Sivasubramonian, National Income, Table 6.9 and Reserve Bank of India, Handbook of Statistics, Table 1.

The fluctuations in the 1930s and 1940s were because of price movements, but the ratio generally stood above the 2 per cent mark. The ratio began to fall steeply only in the late 1960s, and by 2010 domestic MO transactions comprised an insignificant share of overall economic activity. What factors explain this decline? Was it a reduction in migration volumes or a switch of preferences of migrants towards other remittance mechanisms? As migration patterns broadly persisted in many parts of India well into the late twentieth century,⁶⁰ the latter answer is more likely. The switch in preferences occurred due to a steep rise in MO costs that priced out the postal business.

Since its inception, commission costs on MOs were based on a slab structure with effective transaction costs below 1–2 per cent of the value of MO sent. The effective transaction rate, computed as the ratio of total commissions earned on MOs to total value of MOs issued, stood at 1.7 per cent in the late 1950s.⁶¹ After the late 1960s, the transaction rate began to nudge upward of 2 per cent in the 1970s, 3 per cent in the 1980s, 4 per cent in the 1990s and nearly 5 per cent in the 2000s. The trigger for this change in pricing was the 1968 Tariff Enquiry Report which noted that the MO was priced too cheaply and that the department was ‘losing heavily’ on account of the MO service.⁶² The Report noted the public welfare aspect of MOs but recommended a new pricing policy such that the service was ‘self-supporting’.

The ‘exorbitant’ costs of the newly priced MOs were quickly noted by commentators in the 1970s who pointed out that commercial bank drafts provided similar facilities at a transaction cost of less than 1 per cent.⁶³ As a result of competition from banks and informal money transfer operators, such as, the tappawalas, plying on the Orissa–Gujarat migration corridor,⁶⁴ the postal MO business was and continues to be seen as being too expensive.⁶⁵

Since it introduced the first mass financial service in India in 1880, the Post Office played a leading role in the domestic remittance market for nearly a century. At its height in the early twentieth century, the Post Office was a dominant player in the domestic remittance market with sizable MO issues as a proportion of aggregate economic activity. Since the mid-1960s, however, the Post Office was priced out of the market due to a sharp increase in commission costs and competition and its current market share is less than 10 per cent.⁶⁶ Despite numerous recent innovations, the Post Office is unlikely to regain market share in the near future unless it reduces its transaction fee that remains exorbitantly high at 5 per cent. For a migrant worker, this forms a tax on savings, as it means imparting 5 per cent of his or her monthly savings to the postal department for the simple function of transferring money. This cost is also very high in comparison to other service providers who are able to charge less than 1 per cent.

Development of International Money Order Business, 1880–2010

Overseas labour emigration from India was well under way before 1880, but it gained a significant momentum only in the last decades of the nineteenth century. Migrants, almost exclusively drawn from the East Coast, Eastern Uttar Pradesh and Bihar, headed towards Burma (now Myanmar), Ceylon (now Sri Lanka), Straits Settlements and Federated Malay States (now parts of Malaysia), South Africa and regions in the Caribbean, among many other destinations.⁶⁷ From the west coast, a steady stream of traders and professionals would migrate to East Africa.

A large part of these migrations were male-dominated in nature and hence required a reliable remittance mechanism to support families back home. As the Indian Post Office took over the MO operations in 1880, it was poised to meet this requirement. MO conventions with several countries and colonies were ratified in the next couple of decades and the Post Office began to cater to migrant workers’ remittance needs in different and distant parts of the world.

Table 1 shows the MO exchanges between India and selected countries with significant emigrant stocks, circa 1910.

Columns 7 and 8 of Table 1 show the one-way flow of money towards India from these regions as MOs paid in India constituted over 90 per cent of the MO exchanges. These flows were essentially migrants’ remittances, and they correlate well with emigrant stocks.⁶⁸ Various annual reports and archival records also attested to this relationship. In 1893, it was noted that

Ceylon pours into India between 10 and 11 lakhs of rupees a year while receiving in return less than a lakh, the great bulk of the former remittances being, no doubt, made by Madrasis of the lower orders, mostly coolies, who have obtained employment in Ceylon.⁶⁹

Six decades later, officials working on MO exchanges with Malaysia noted that the MOs received from there were made by ‘Indian nationals for payment to their families in India’.⁷⁰ In Burma, however, nearly 30 per cent of remittances were TMOs, mainly to the Madras Postal Circle representing ‘business remittances by contractors and others’, and did not necessarily reflect migrants’ remittances.⁷¹

Table 1

International Postal Money Orders between India and Select Regions, c. 1910

	Issued in India			Paid in India			Paid/Total (%)		Remittance Share of Total (%)	Indian Emigrants
	Number	Value (₹)	Avg. Value	Number	Value (₹)	Avg. Value	Number	Value (₹)
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)
Asia
Burma	152,612	3,183,438	21	1,219,408	37,980,469	31	89	92	61.4	500,000
Ceylon	14,541	537,413	37	270,896	7,901,448	29	95	94	12.8	473,830
Federated Malay States	1,200	43,404	36	65,810	4,587,878	70	98	99	7.4	153,761
Straits Settlements	1,291	61,640	48	47,518	2,880,254	61	97	98	4.7	65,957
Hong Kong	2,169	163,549	75	8,641	545,197	63	80	77	0.9	2,397
Sarawak	8	132	17	581	32,140	55	99	100	0.1	NA
British North Borneo	4	222	56	458	45,557	99	99	100	0.1	902
Africa
South Africa*	368	27,090	74	22,780	4,263,735	187	98	99	6.9	85,003
Mauritius	404	21,153	52	1,651	74,055	45	80	78	0.1	35,349
Nyasaland (now Malawi)	10	720	72	481	81,330	169	98	99	0.1	474
Zanzibar	172	21,576	125	7,044	563,909	80	98	96	0.9	8,122
Egypt	1,145	5,898	5	3,734	66,460	18	77	92	0.1	NA
British East Africa	385	23,811	62	19,727	1,479,820	75	98	98	2.4	15,000
German East Africa	34	2,517	74	8,006	1,299,566	162	100	100	2.1	10,000
South America & Caribbean
Trinidad*	18	1,980	110	834	54,255	65	98	96	0.1	50,583
British Guiana*	25	1,710	68	805	51,165	64	97	97	0.1	85,201
Total (above countries)	174,386	4,096,253	23	1,678,374	61,907,238	37	91	94	100	1,486,579

Sources: Columns 1, 2, 4, 5 are from Annual Report of Indian Post Office, 1913–14 and are for the year 1912–13. For Burma, it is assumed that 10 per cent of ‘domestic’orders paid in Burma are sourced in India while the rest were sourced from Burma itself. Accordingly, the volume and amount of MO exchanges between Burma and India are estimated. Columns 3 and 6 are average values computed from Columns 1, 2 and 4, 5. Columns 7 and 8 refer to the share of ‘paid’ orders out of the total MO’ exchanges between India and the country. Column 9 is each country’s share of MOs paid in India out of the total. Column 10 refers to Indians emigrants, born in India, and is taken from the census of India, 1911, Vol. 1, Part. 1, p. 109. Figure for Burma from page 99 of same report. Figures for British East Africa and German East Africa are estimates using figures from the Census 1911 report as well as Census 1931 report for a benchmark.

Notes: *Foreign Sterling orders converted to rupees at £1 = ₹ 15 as mentioned in the annual report. All other MOs are foreign rupee orders. India refers to undivided India or present-day India, Pakistan and Bangladesh. NA, not available.

On the eve of the First World War, over 1.6 million MOs amounting to more than ₹ 60 million were being remitted to India on an annual basis, a figure that formed around 0.3 per cent of India’s GDP.⁷² Nearly 90 per cent of the flows originated in Burma, Ceylon, the Malaya regions and South Africa. Remittances from Burma, in particular, were nearly five times higher than from Ceylon even though the reported emigrant stocks of Indians were of similar magnitudes. Even after accounting for the higher level of business remittances from Burma, the large difference remains. The most likely reason for this continued difference is that remittances from Ceylon were also being channelled through hand-transfers or other non-postal channels as emigrants were relatively closer to their homes in India.⁷³ Remittances were also relatively lower in volume from Mauritius, Trinidad and British Guiana because emigration to these regions had slowed down considerably in the decades before 1910.

It is difficult to interpret the average values of remittances sent, but from Table 1 it appears that higher values were associated with longer distances. This suggests that migrants would make more frequent remittances of smaller amounts when they were relatively closer to the subcontinent.

Foreign MOs also enabled British migrants—especially soldiers and administrative personnel—to remit their savings back home. In the late nineteenth century, this resulted in net MO remittance outflows towards Britain, but these flows were very small compared to the total flows being received from overseas Indians in India. Over time, net MO remittances to India from Britain became marginal as migrants’ remittances towards Britain were compensated by MO flows towards India for buying gifts and objects of small value.

Figure 3 shows the development of the foreign MO business over the twentieth century. The chart shows the steady rise of business in the first two decades, a slump in the early 1920s and during the 1930s Great Depression, a statistical rise on including Burmese data since 1937 and a sharp fall in volume during the Second World War. This decline was not only due to a sharp reduction in migration and trading volumes but also because of heavy return migration from Burma due to political reasons that dried an important source of MO business. After the Second World War, the foreign MO remittance business again picked up due to higher levels of migration.

Figure 3

Source: Various Annual Reports of the Indian Post Office; Indiastat.com.

On 27 June 1957, all outward MOs were suspended due to the strict implementation of exchange controls by the Reserve Bank of India. The balance of payments ‘crisis of 1956–58’, as it was later called, led to strict controls on a variety of transactions including ‘emigration facilities’.⁷⁴ The one-way suspension of MOs could not withstand the rules of international MO conventions and soon the entire foreign MO business collapsed, marking the end of an important financial service imparted by the Post Office for nearly eight decades. On hindsight, this was unfortunate because the international remittance business grew tremendously since the 1970s, especially with surging labour migration to the Gulf region. Currently, India is the largest recipient of migrant’s remittances in the world. More than $ 70 billion worth migrants’ remittances are channelled through commercial banks and private money transfer operators. International remittances are a much more lucrative business than domestic remittances due to opportunities of earning ‘gain on exchange’. Somewhat belatedly, India Post signed an agreement with Western Union in 2001 as a distribution partner and launched a new service called MO Videsh in 2009.⁷⁵ These efforts are unlikely to alter the international remittance market structure significantly, but they do mark the return of an institution that once was the main player in this market.

The Rise of the Postal Savings Bank

Origins and the System

The successful launch of postal MOs in Britain in 1838 paved the way for the delivery of other financial services, the most notable being banking through the British Post Office Savings Bank (POSB) established in 1861.⁷⁶ Similar postal banks were established in other countries and colonies: Canada in 1868, Italy in 1876, France and Austria in 1883 and after protracted debates in the United States in 1911.⁷⁷

Just as in the case of the MO system, savings banks emerged in India in 1870, not in the Post Office but in the district treasuries as District or Government Savings Banks. Prior to this, thrift institutions had been introduced in the mid-1830s in the three major Presidency towns.⁷⁸ POSBs eventually emerged in 1882 to extend banking facilities in the ‘interior of districts’ and assumed control of a large part of the savings system on the amalgamation of accounts with the district treasuries in 1886 and the savings business of the three Presidency banks in 1896.⁷⁹

The small savings system was simple to understand, and the essence of it has barely changed till date. It is best described in the annual report that described its launch:

Any person can deposit money on his own behalf and on behalf of a minor if a relative. The minimum deposit was fixed at four annas, and no sum can be received that is not a multiple of four annas. Interest…represents 3¾ per cent per annum. The power of withdrawal can be exercised once a week. And Government securities may be purchased on behalf of the depositors.⁸⁰

The accounts would also have limits for maximum balances. Perhaps the most novel feature of the postal savings system at that time was the concept of a ‘passbook’ for the public. Cash kept at home, if lost or stolen, was gone forever. But a lost passbook only required a replacement, provided that the Post Office had maintained its accounts. The passbook generated tremendous interest from depositors who were curious to understand its intricacies. It also invited attention from fraudsters as there were innumerable cases reported of stolen passbooks, altered entries and incorrect withdrawals.⁸¹

For the first few decades, the POSB only offered facilities to collect simple deposits. Term deposits were introduced on an experimental basis but ‘failed to find favour with the public’ and abolished in 1911.⁸² The Post Office collected deposits from the public on behalf of the treasury which was responsible for the investment of the funds. This agency function continues till date, intimately linking the Post Office and what is known today as the Ministry of Finance.

In the period 1917–18, the Post Office issued a five-year cash certificate to the public on behalf of the War Loan, yielding 4.5 per cent per annum.⁸³ This was followed by the National Savings Certificate (NSC) with longer-term limits and the Defence Savings Certificate, the latter issued only until 1943.⁸⁴ The NSC was also used as a mechanism of payment, for instance, of ‘bonus to the mill workers in Bombay’,⁸⁵ who as noted earlier also had a high propensity of sending MO remittances.

Partition in 1947 had a major impact on the postal savings system in the affected areas because many refugees lost their postal cash certificates and passbooks and several post offices were destroyed in the ensuing violence.⁸⁶ The usual procedure of encashing certificates or withdrawing money from external offices involved pre-verification and transfers from the depositors’ registered offices. As the normal methods for transfers between post offices in Pakistan and India had broken down, special facilities were set up, whereby claims were verified without physical transfer of documents.

Major developments of the postal savings system in the post-independence period include the greater adoption of cheques as a means of withdrawals and deposits, various tax concessions, attractive interest rates and a proliferation of term deposits and savings certificates. The new financial instruments were marketed through sales agents on a commission basis. Currently, in addition to the savings account, depositors can place their money in as many as six different instruments supplied by the Post Office.⁸⁷

Development of the Postal Savings Business, 1882–2010

After the launch of POSBs in 1882, special efforts were made to ‘make the object and existence of the institution widely known among the native communities’.⁸⁸ However, the banks largely catered to urban areas and depositors who were salaried employees. In the initial decades, around 10 per cent of the depositors continued to be of European origin and 10 per cent of the deposits were also held by charitable, religious, educational and provident institutions and regiments and the police.⁸⁹ It was observed that there was ‘no sign yet of any of the agricultural classes making use of the opportunities for thrift supplied by the Post Office Banks’ and this remained the case in 1912, the last year for which class-wise distribution of depositors is available.⁹⁰ Nevertheless, the Post Office did appear to cater to depositors with relatively lower incomes as compared to the Presidency Banks in the earlier period which were confined to the big cities.⁹¹ It was referred to as the ‘poor man’s bank’ as early as in 1921 though at this time, the bulk of the population was still out of its reach.⁹²

Figure 4 shows the evolution of the depositor/population ratio across the twentieth century. The number of accounts held in the POSB is used as the indicator for the number of depositors as each person usually had only one account and the number of institutional depositors was small. While the ratio steadily increased in the first half of the century, it was only 1 per cent before Second World War. More than 4 million people had POSB accounts with an average balance of around ₹ 190. The deposit/GDP ratio during this period averaged around 1 per cent until the 1930s, and rose to 3 per cent during the 1930s as the economy slowed down and postal instruments gained popularity as a means for deposits.⁹³

The funds collected in the first few decades of the twentieth century constituted about 5 per cent of total government debt and 16 per cent of central government rupee debt.⁹⁴ In this period, the regional variation in the system was quite stark, with Bombay at one end exhibiting relatively high usage of the postal savings system and large average account balances, to Madras on the other end with the lowest average account balances.⁹⁵ In the interwar period, Punjab emerged as a major centre for growth in the postal savings business.⁹⁶

Figure 4

Source: Various Annual Reports of the Indian Post Office; Sivasubramonian, National Income, Table 6.9 and 8(a) and Reserve Bank of India, Handbook of Statistics, Table 1.

The postal banking business exploded in independent India as it coincided with the most important development in India’s recent postal history—network expansion. Indian planners were keenly aware of the potential of the Post Office to connect remote places with small and large towns and dedicated funds towards postal network expansion in the very first Five-Year Plan.⁹⁷ In the period 1948–49, there were around 20,000 post offices, of which some 16,000 were in rural areas. By 1960, these figures had more than doubled and by 1970, there were 75,000 offices. The 1970s alone witnessed the addition of an astonishing 60,000 offices. Growth slowed after that and the number of offices has somewhat plateaued at the 155,000 mark today, 90 per cent of the offices being located in rural areas.⁹⁸ The bulk of the expansion, especially after the 1960s, took place in the category of ‘extra-departmental’ offices which required fewer office hours and attendance of personnel than the ‘departmental’ offices. Both types of offices, however, delivered financial services and thus took banking and remittance services to the rural hinterland of India.⁹⁹

This network expansion had a significant impact on the growth of the postal savings business as depicted in Figure 4. Between 1950 and 1970, the depositor/population ratio increased from under 1 per cent to over 5 per cent. In the next two decades, the ratio stagnated partly because of the growing attraction of non-POSB postal financial instruments, such as, time deposits and certificates. These small savings schemes were marketed aggressively to inculcate a ‘savings habit’ as successive five-year plans exhorted the need to increase the savings and investment rates of the country. Figure 5 shows a typical advertisement for a postal small savings product in 1957.

Figure 6 shows a large rise in the percentage of postal small savings held as certificates between 1970 and 1990 from under 20 per cent to over 60 per cent. All through this period, the household financial savings rate in the economy also improved from less than 30 per cent to more than 40 per cent. As a proportion of the aggregate economy or GDP, the share of small savings collected by the postal department doubled from around 5 per cent in the 1970s to 10 per cent in 2010. Savings deposits (and certificates) held in postal accounts amounted to almost as much as those held in all other scheduled commercial banks put together, reflecting the significance of the Post Office in comparison to other banks.

Due to the discontinuation of certain postal certificates in the late 1990s, the attraction of the Post Office as a deposit-receiving institution began to wane. However, a strong boost was given to this business with the passage of the National Rural Employment Guarantee Act (NREGA) in 2005 and the subsequent option of payment of wages through POSB accounts. As a result, the depositor/population ratio nearly doubled to 10 per cent in 2012 (Figure 4). That is, today, 10 per cent of the Indian population has a savings bank account with the Post Office, with the majority of the accounts being held in rural India. The low average bank balance of ₹ 3,000 shows why the Post Office is rightly called the poor person’s bank of India.

Figure 5

Source: Times of India, 29 June 1957, Supplement, p. 17.

Figure 6

Source: Reserve Bank of India, Handbook of Statistics 2012–13, Tables 1, 10, 50 and 125.

Towards Financial Inclusion

Despite substantial expansion of commercial banks in rural areas, basic financial services through official channels were out of bounds for nearly two-thirds of the population at the end of the twentieth century. According to the census of 2001, the percentage of households availing banking facilities in India was only 35 per cent (30 per cent in rural areas and 50 per cent in urban areas).¹⁰⁰ While the Post Office of India, as the previous discussions have shown, provided useful and significant services to millions of depositors and remitters, the institution itself was not recognised in policy circles as a major vehicle to deliver financial services. Policy documents tended to privilege established financial institutions, such as, commercial banks, cooperatives or microfinance institutions and largely ignored the Post Office.

This situation changed in the past decade as ‘financial inclusion’ became a buzzword among policymakers around the world after a landmark report of the United Nations was published in 2006.¹⁰¹ A high-level committee on financial inclusion in India was subsequently set up to suggest a policy framework within which financial services were to be promoted to the unbanked population in India. Financial inclusion was defined as ‘the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost’.¹⁰²

Policymakers and analysts quickly realised the potential of the Post Office to actively promote financial inclusion. As compared to around 34,000 rural banks, the 155,000 odd Post Offices provided a much larger distribution network to provide financial services in rural areas and had a greater ‘brand recall’.¹⁰³ In 2006, the Reserve Bank of India collaborated with India Post to integrate it in the payments and settlement system. Later, wage payments in the NREGA schemes were also paid in postal accounts. By 2009, India Post held 46 per cent of all NREGA scheme accounts with more than 90,000 post offices distributing ₹ 35 billion to workers in rural areas.¹⁰⁴ The opening of new postal accounts for the NREGA schemes increased the presence of the Post Office in the financial lives of many more Indians than before (as seen in Figure 4) and in combination with other financial products helped foster greater financial inclusion. The census of 2011 thus showed a formidable rise in the percentage of households availing banking facilities from 35 per cent to nearly 60 per cent (55 per cent in rural areas and 68 per cent in urban areas).¹⁰⁵

It should be clear from the discussion so far that the roots of financial inclusion in India lie in the activities of the postal department rather than in non-postal banks. This is not merely to state the significance of the Post Office but also to argue its institutional advantage over other banks.

Non-postal banks in India are often seen as ‘sophisticated’ institutions beyond the reach of the majority of the population. In contrast, the postal department is a part of people’s daily lives and interacts more with the public than any other public institution.¹⁰⁶ To understand this notion of institutional dependence, it is useful to compare the following two comments, taken nearly a century apart from each other, to illustrate the popular image of the Post Office as compared to banks:

Probably in no country of the world is the poor man so dependent upon the Post Office…. An Indian coolie in Burma, who has saved a few hundred rupees and wants to return to his village, seldom carries the money on his person, and he has a strange mistrust for banks; they are much too grand places for him to enter. He usually goes to a post office and sends to himself a money order addressed to the post office nearest his own home and then he is satisfied. (Comment in 1921, emphasis added)¹⁰⁷

The basic services are not just the delivery of letters and postcards, but the ‘money order’ as well, for which most poor and illiterate people rely on the Post Office, in preference to banks, because of its simplicity and ease of access. (Comment in 2005, emphasis added)¹⁰⁸

Both commentators emphasise the preference of the Post Office over the banks for the poor. This perception would have developed over the course of time because of the daily interactions of people with the Post Office and, in particular, its financial services. The reliance of migrant workers on the Post Office for nearly a century since 1880 as a means for internal and international migrants’ remittances has led to an aura of dependability. Further, the cultivation of a banking habit among the rural masses can be attributed primarily to the presence of the Post Office, especially after the massive increase in network expansion in the past five decades.

The activities of the postal department themselves reveal that financial inclusion was, for the most part, an actively pursued policy. The many postal innovations of the late nineteenth century documented earlier attest to the creative ways in which the department interacted with the public. The Commission on MOs until the 1960s was extremely low and postal officials hesitated in raising these costs. In the 1950s, an internal department file shows that postal officials aborted a raise in MO fees as ‘it was considered that an increase would hit the poorer section of the community who work in industrial or commercial centres and send small remittances to their homes’.¹⁰⁹ Later increases in MO fees appear to have deviated significantly from the general attitude of the Post Office with respect to financial services. Not surprisingly, it led to financial exclusion, not only for the migrants but also for the Post Office as it rapidly lost market share in the remittance business.

The expansion of the postal network in the second half of the twentieth century also attests to a deep concern for enhancing financial inclusion. The status of the Post Office as the poor man’s bank reflects its primacy in the financial world of the poor in India even though it is not a money-lending institution. Commentators have pointed out the paradox of rural financial services in India that are offered by formal and informal institutions that lend but often do not accept deposits and the Post Office, which collects deposits but does not lend.¹¹⁰ This situation however may change in the near future as the Post Office increasingly asserts itself as a financial institution.

Conclusion

The postal network expanded rapidly in the late nineteenth century and then again in the latter half of the twentieth century as the state played an active role in connecting remote places through postal communication. This extensive network formed the basis for the transformation of the Post Office into an important financial institution of the early twenty-first century.

Postal financial services have had a chequered history so far. Its flagship service for much of the twentieth century—MOs—was an important business in the early twentieth century with volumes in the range of 2–3 per cent of GDP. The MO service introduced official financial services to non-elites for the first time in Indian history. It provided a cheap means of remittances for migrants in India and overseas, until foreign exchange regulations and high costs swept away the foreign and domestic MO businesses, respectively.

Postal savings accounts, initiated in 1882, failed to make a significant mark in the colonial era but emerged as an important channel of mobilising deposits in independent India. Network expansion, familiarity of the Post Office, tax concessions and advertisements helped push postal banking services throughout the country such that, currently, the depositor/population ratio stands as high as 10 per cent.

As the largest banking institution in terms of network, accounts and personal deposits, the Post Office continues to be a relevant institution, even as the nature and rationale of its existence has changed over time. If financial inclusion and development means the cultivation of a saving habit and the promotion of regular interaction with formal sector financial services, then the key institutional actor in the past century has been the Post Office of India. Thus, the history of postal financial services reveals an important pathway through which the state weaved its way into Indian society.

Footnotes

Acknowledgements

I would like to thank Sheetal Bharat, Devyani Gupta, Gagan Sood and Paulami Biswas for valuable comments on this article.

Notes

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Towards financial inclusion: The post office of India as a financial institution,1880–2010

Abstract

Keywords

The Rise and Decline of the Postal Money Order Remittance Service

Origins

System and Innovations

Development of Domestic Money Order Business, 1880–2010

Development of International Money Order Business, 1880–2010

The Rise of the Postal Savings Bank

Origins and the System

Development of the Postal Savings Business, 1882–2010

Towards Financial Inclusion

Conclusion

Footnotes

Acknowledgements

Notes

References