Demonetisation effect: Unbanked villages, small businesses badly hit as currency crisis continues

Huge pressure on rural banks; 55% of unregistered MSMEs in villages where cash rules

Written by Anil Sasi , P Vaidyanathan Iyer | New Delhi | Updated: November 21, 2016 2:29 pm
demonetisation, demonetisation effects, demonetization india, demonetisation news, india news, demonetisation protests, protests demonetisation Farmers protest against demonetisation and restrictions imposed on cooperative banks, in Surat on Saturday. (Express Photo by Hanif Malek)

The lopsided rural-urban spread of ATMs and bank branches has snuffed out economic activity in rural India, with micro, tiny and small enterprises finding it impossible to get cash in 100-rupee notes for their daily operations.

Consider this statistic: every bank branch in a rural and semi-urban centre caters to more than double the number of people in an urban and metropolitan centre. According to a December 2015 Reserve Bank of India report on “financial inclusion in India”, each rural and semi-urban bank branch serves 12,863 people compared with an urban and metropolitan branch which serves just 5,351 people. The spread of ATMs too is skewed in favour of urban centres. Delhi, for instance, has 9,070 ATMs, more than Rajasthan, the largest state in terms of size.

WATCH VIDEO: Here’s What The Leader Of Bank Officers’ Union Said Over Demonetisation

Now, juxtapose this with the spatial distribution of micro, small and medium enterprises. The data on MSMEs, as per the latest available Fourth Census of MSME, 2006-07, reveal there are 200.18 lakh unregistered rural sector units, and they make up over 55 per cent of such enterprises in India. Urban SMEs are 161.58 lakh. The data from 2007-08 to 2014-15, compiled from the Entrepreneurs Memorandum filed by MSMEs in District Industries Centres, suggests that 22.10 lakh units were added during this period. It doesn’t say if they are rural or urban, but even if they were evenly spread, it does not change the broad picture.

Abhitabh Meshram, an entrepreneur in Nagpur, who supplies potable water in bulk to enterprises including government departments, says there is difficulty in paying cash to even hawkers for intra-city transport and workers, who are paid weekly. “I have another agri-based business, but in mandis, they wouldn’t supply large quantities of onion or garlic without cash.”

Zoom out to a particular state, for instance, Tamil Nadu. It has a million-plus tiny and small units. “There will be no production for a month-and-a-half. Many units in Chennai are still recovering their losses from the previous year when the city was flooded during the monsoon. While it is certain we will not register any sale, it is even more certain banks will debit the EMI from bank accounts on existing loans,” said C Babu, President, Tamilnadu Small and Tiny Industries Association, an umbrella organisation that represents such units, which employ over 15 million workers in all.

“Inadequacy of bank branches is one primary reason why cash dominates small businesses. Many rural branches are open for just a day or two in a week. People consider bank postings in rural India as a punishment,” says Anil Bhardwaj, Secretary-General, Federation of Micro and Small & Medium Enterprises (Fisme). “The smaller the enterprise, the bigger the problem. Anecdotal reports suggest that manufacturing value addition has come to a standstill,” he says.

WATCH VIDEO

The RBI report suggests that between 2001 and 2015, the number of bank branches in urban and metropolitan centres more than doubled from 20,713 to 43,716. In rural and semi-urban centres, it has increased, but not at such pace. During the period, the number of branches in rural and semi-urban centres has risen from about 44,905 to 82,358. In 2015, there were 7.8 branches for one lakh people in rural India, but 18.7 branches in urban India, proving Bhardwaj’s argument.

The biggest problem, according to V K Agarwal, former president of Fisme, is that the fine distinction between unaccounted cash and black money is lost. “Money that is derived from illegal activity is harmful, but money circulated in small businesses only adds to economic activity,” he says.

Bulk of the MSMEs in India have turnovers in just a few lakhs of rupees. Within MSMEs, medium sized enterprises do not account for even one per cent of the segment. Agarwal, whose mid-sized company Shashi Cables Ltd manufactures transmission line conductors, says he is not affected because he makes payments through RTGS. Moreover, he has staff who can stand in line to withdraw and deposit cash.

“Medium sized enterprises can easily tide over the cash crunch. But most tiny and micro enterprises are proprietor-owned and are managed by just one person. They are in terrible shape,” Agarwal says. While it is difficult to say if jobs are being lost yet, those associated with the MSME segment say economic activity has definitely dropped.
“MSME is a very heterogenous sector. In the unorganised MSME segment, it takes a long time to even realise that businesses are being shut. It is too late by then,” says Bhardwaj, Secretary-General, Fisme. While the sector appreciates the need to move to a cashless economy, it needs time. “How can you move to Paytm in a week or a fortnight? It will take a couple of years,” he says.

“The government must realise that the small-scale sector will certainly pick it up (move to e-payments). But it is a gradual process. Also, it is important to acknowledge that money generated in business is not irregular. Certain issues cannot be pushed so much that the system chokes and the outcome is distorted,” says Agarwal.

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First Published on: November 20, 2016 4:22 am
  1. A
    ALBERT ANTONIO
    Jan 14, 2017 at 5:23 pm
    A look at most people in queues all over the country shows its the poor and lower middle-cl who were to be seen. Hardly any crooked rich, corrupt politicians and bureaucrats! So who suffered most due to DeMo? Clearly the poor!
    Reply
    1. A
      Aid
      Nov 20, 2016 at 2:55 am
      Iam a man from Tamilnadu Iam able to see people are under problem but it is because their own mistake within 5 kilometer radius we can find a bank my age is 44 Unaccounted cash if it piles up it is called as black money lt;br/gt;Author this write up shows his poor knowledge over Tamilnadu
      Reply
      1. A
        Aid
        Nov 20, 2016 at 2:59 am
        Tamilnadu had all the facilities to convert itself into almost cash free statelt;br/gt;Where did the cheapest Christians converts go let them come and help people by converting this
        Reply
        1. D
          Devraj
          Nov 20, 2016 at 4:48 am
          Informative and well written article. Have to completely agree with V K Agarwal that cash based economy is NOT black economy as physical currency is what carries Peoples Trust and that is EVERYTHING - once list it cannot be regained. It is also the most secure form of payments with immediate guarantees. Note that the ePayments and anything E are fraught with security loops and people can lose everything to online theft within a second and NO ONE can help.lt;br/gt;lt;br/gt;Modi MUST step down NOW for causing so much economic devastation, chaos, inconvenience and DEATH OF SO MANY PEOPLE just to bail out the super rich failures like Vijay Mallya with poor peoples monies by creating the bad bank. BHARATH WILL GO BANKRUPT IF THIS IS LET TO CONTINUE.
          Reply
          1. H
            hitender
            Nov 20, 2016 at 8:23 am
            As usual "Don't care" atude of Indian Government. They enforce decision without planning the implementation. Take any example and you will see common man suffering due to government decision. (Such nonsense is regardless of Congress or BJP though). The core issue is allowing non-professionals to manage such large country. People who cannot manage a speech or their own province, are allowed to lead a 1.3B large nation. Shame on these incompetent people. lt;br/gt;lt;br/gt;Can someone p these reactions and feedback to finance ministry? Either provide facts that the news is incorrect or fix the situation in 24 Hours. Only such action will demonstrate professionalism of the folks in government.
            Reply
            1. P
              PCKULKARNI
              Nov 20, 2016 at 6:30 am
              Wandering in fool' paradise Mr. Bhakt
              Reply
              1. P
                PCKULKARNI
                Nov 20, 2016 at 6:28 am
                What are bhakts like you doing?
                Reply
                1. V
                  Vikrant
                  Nov 20, 2016 at 5:06 am
                  Suddenly definition of bribes has changed to gifts and expression of graude. It is more the corrupt and their paid agents who are cribbing and trying to create a atmosphere of fear.
                  Reply
                  1. V
                    Vikrant
                    Nov 20, 2016 at 5:03 am
                    Thanks to the great saviors of poor who ruled the country for so many years the villagers were kept out of banking system. Banking system was only for the elite. Medical system and education system was only for the elite. How could all these facilities be provided to the poor? If the poor had all the facilities then how could Yuvraj take his elite white friends for visits to the houses of poor?
                    Reply
                    1. S
                      Santosh Pathak
                      Nov 20, 2016 at 2:42 pm
                      Just visited a village 130km from Kolkata. Nobody even has got bank account. Nearest bank is 12km from village.
                      Reply
                      1. A
                        atul
                        Nov 20, 2016 at 7:53 am
                        Ask Impotent Feku to get back his WIFE first before doing nation building. Amit Shah Mohan Bhagwat and RSS Chadi wala's should be shot at Chandi Chowk for creating all nuisances in India. All blind bakhts should be shot in both eyes to remain blind for ever
                        Reply
                        1. A
                          Avinash
                          Nov 21, 2016 at 12:44 am
                          Well, i too feel the same. This is just to defunct opposition who ofcourse had cash in hand...and now, since BJP guys were knowing about it - they surely would have managed before breaking the news.
                          Reply
                          1. M
                            mark
                            Nov 20, 2016 at 1:41 am
                            While the rich adani and ambani have all converted their black to white, its the small entrepreneurs who have got whacked.lt;br/gt;lt;br/gt;Thank you Modiji. Bharat Mata ki jai.
                            Reply
                            1. P
                              Prakash
                              Nov 20, 2016 at 5:29 am
                              I think u r worried about your black money. You will go bankprut, not Bharat
                              Reply
                              1. C
                                C Panneerselvam
                                Nov 20, 2016 at 7:05 pm
                                Hi your comment looks nonsense. Why do you bring religion here?. Are you been radicalized by BJP and RSS goons?
                                Reply
                                1. C
                                  C Panneerselvam
                                  Nov 20, 2016 at 7:14 pm
                                  This is the standard reply we can expect from Modi's bhaktas. They create trouble and expect others to help.
                                  Reply
                                  1. D
                                    DC Resident
                                    Nov 20, 2016 at 4:35 pm
                                    The real issue is could Modi have at least taken some partial steps to help the common Indian such as greater limits in rural areas. If he could do it for Adani/Ambani why not for the common Indian.
                                    Reply
                                    1. D
                                      DC Resident
                                      Nov 20, 2016 at 4:37 pm
                                      Well, the purchase of gold more than tripled in the week before the demonetisation announcement. So definitely some people knew!
                                      Reply
                                      1. D
                                        dd
                                        Nov 20, 2016 at 12:44 am
                                        IE is expert in spreading panic...iE reporters can't see any improvement and give hope to people..stead it is creating panic.
                                        Reply
                                        1. H
                                          hypo crite
                                          Nov 20, 2016 at 4:21 am
                                          Good move by govt, but more homework was needed. We cant afford failure of demonatisation at this stage. FM pls pull your socks and get through it.
                                          Reply
                                          1. J
                                            Jagdish
                                            Nov 20, 2016 at 1:00 am
                                            Every Common man including elderly, Farmers, labourers, middle cl, poor and common man is only penalised under Demonetisation but Political parties mainly in power are not covered and free to keep all their election funding from undisclosed sources though it is more than 80 percent of all their election spending. Corporates and riches to fund the politicial parties with their Black Money are well protected by modi Government.
                                            Reply
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