Vanishing Note, Yawning Chasm

Govt hopes demonetisation will accelerate India's drive towards a cashless economy. The challenge, however, is to get the unbanked millions into the net.

Written by Shaji Vikraman | Mumbai | Updated: November 21, 2016 12:33 pm
demonetisation, State Bank of India, sbi, Point of Sales, pos, cashless, cashless transactions, demonetisation impact, business news (Illustration by C R Sasikumar)

For most of this year, bankers at State Bank of India, the country’s largest bank, were trying hard to market Point of Sales (POS) machines for debit and credit cards to small businesses and establishments. This would give the bank access to funds at relatively lower costs as the owners would have to open current accounts, too.

But few were biting, despite a slew of incentives, including lowering the merchant discount rate and annual rental fee. For many of these small businesses — long used to transacting in cash, especially in the hinterland — there was no major trigger to move towards electronic payments. Until November 8 happened, when the government announced its decision to do away with Rs 500 and Rs 1,000 notes.

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All of a sudden, things began to change. A few days later, the SBI branch in the newly formed Nirmal district of Telangana, received requests from 250 customers for POS machines. It was the same story across the country, and SBI officials said card-based transactions using POS machines surged almost three-fold. At the same time, mobile wallet providers were busy honing their mobile apps (see box).

Experts say the demonetisation move could well be the tipping moment in India’s drive to move towards a cashless economy, reflecting the change in how money is dealt with in an economy that has one of the highest cash-to-GDP ratio of over 12 compared to bigger economies with a ratio of below 5.

* At the end of fiscal 2015, electronic transactions at Rs 92 lakh crore topped paper-based ones at Rs 85 lakh
crore transactions.

* This January, over 188 million transactions were carried out through electronic fund transfers of a value of Rs 7,086 billion. By October, this rose to over 133 million transactions of a value of over Rs 9,500 billion.

Paytm, the country’s top mobile payments and commerce platform, with over 150 million wallets, reported a 700% surge in traffic over the last week and 1,000% growth in the amount of money added, with 5 million transactions.

WATCH VIDEO: How Demonetisation Impacts Rural Population

But there is a flip side — the wide urban-rural divide in a country where a large swathe of the population doesn’t have access to banking services and over 50% are below the age of 35.

* India’s unbanked population was 233 million in 2015, according to a report by Pricewaterhouse Coopers India for the Internet and Mobile Association of India (IAMAI) and Payments Council of India (PCI).

* 107.3 crore Aadhaar cards had been issued by October 2016.

* The number of mobile payment customers of all banks is only a shade below 120 million.

* 25.51 crore Jan Dhan accounts have been opened so far, out of which 23.27 % accounts are zero-balance.

But the change “will happen fast”, says Nandan Nilekani, former head of the Unique Identification Authority of India (UIDAI), one of the founders of Infosys and a big advocate of the merits of a cashless economy.

“The latest decision to demonetise will accelerate the process as people thought cash was friction-free. That is no longer the case and more people are bound to see the value of digital payments. That acceleration is certain to be quicker in urban India because of better connectivity and the latest disruption will force more people to get into it,” says Nilekani.

SBI chairperson Arundhati Bhattacharya says the latest demonetisation decision will push the country towards an economy with less cash.

”We have seen a huge uptake in digital transactions… a 300% rise in POS transactions recently and a 200% rise in downloading of our ‘buddy wallet’. I am not saying we will be completely cashless economy now but we will have less cash,” says Bhattacharya.

According to Nilekani, what will drive the big shift is the surge in smartphones and policies that encourage mobile and banking transactions — India has over 100 million Internet users and over 600 million mobile phone users. “They have understood digital already,” he says.

Nilekani also points to the success of the Immediate Payment Service (IMPS), which allows instant interbank fund transfers through mobile phones, launched over five years ago. “Today, transactions worth

Rs 29,000 crore a month are done through IMPS. It shows that if people get the right and convenient mode of transaction, they will go for it. There is also a convergence of technology and market forces. It will accelerate the process of digital transactions,” he says.

Nilekani is also betting big on the Unified Payment Interface (UPI), an application launched a few months ago by the National Payments Corporation of India (NPCI), which aims to facilitate person-to person transactions using a virtual identity.

“As for the urban-rural divide, remember, Indians adapt fast to these changes when you consider that over 80% of the phones sold in India have dual SIMs. Every Indian has understood. He will want that idea,” he says.

But there is much ground to be covered, acknowledged A P Hota, who heads NPCI.

“In the euphoria of the moment, many tend to ignore that integration is still a challenge. The number of mobile payment customers of all banks put together is still only a shade below 120 million. A public policy push may be good but competition is what may best drive the change,” he says, adding that NPCI last week waived the switching fee for member banks and those issuing RuPay cards until December 31.

Nilekani concedes that there could be “pain in the short term”. “It may take one or two months. But once you get over that hump, it will be a big signal shift to digital payments,” he says.

There are others who advise caution, too. Says the chairman of a state-owned bank, who spoke on the condition of anonymity: “Much of these changes are because of the shortage of cash. The test will be when cash becomes available and the current squeeze is eased.”

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