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ALONG WITH the withdrawal from circulation of existing currency notes of Rs 500 and Rs 1,000, the Centre’s decision to limit cash withdrawals from ATMs and banks could provide a short-term fillip for the fast-growing electronic financial services industry of India, dominated by players such as Paytm, Oxigen, MobiKwik, FreeCharge and other start-up companies.
With an increasing number of consumer purchases in India now happening online, the immediate impact from the cap on cash withdrawals is likely to show up in the form of online shoppers and taxi-hailing consumers using mobile wallets or debit cards for daily transactions.
Besides, e-commerce companies could see a move away from the cash-on-delivery payment, which was the fastest growing segment in this space.
“There are limits on cash withdrawal also for the next 50 days — so millions of Indians who never adopted digital payments are now scrambling to figure out how to use a mobile wallet or a debit card for daily life transactions. For retailers, it’s no different.
All their hesitation for card/wallet acceptance will now disappear as they will be forced to declare all their income by depositing cash in banks. Cash on delivery for e-commerce will now become a thing of the past,” said Upasana Taku, co-founder of MobiKwik.
On Tuesday, Prime Minister Narendra Modi announced that ATM withdrawals will be restricted to Rs 2,000 per day per card in the first few days, and this limit would be increased to Rs 4,000 a day. Withdrawals from bank accounts will be limited to Rs 10,000 a day and Rs 20,000 a week initially.
According to a research report by EY, a move by traditional financial services firms towards an electronic payments system could help them serve a mass market, which otherwise may have been out of reach due to high physical infrastructure costs.
According to the report, there were over 429.6 million people over the age of 15 who are unbanked, and present an opportunity for financial institutions through the electronic route, which primarily depends on a cashless system.
In his Union Budget for 2015-16, Finance Minister Arun Jaitley had said: “One way to curb the flow of black money is to discourage transactions in cash. Now that a majority of Indians have or can have a RuPay debit card, I therefore, propose to introduce several measures that will incentivise or credit or debit card transactions, and disincentivise cash transactions.”
This February, Peter Sands, former chief executive of Standard Chartered Bank, had published a research paper at the Harvard Kennedy School, which proposed taking high denomination notes out of circulation.
Sands wrote that even though the electronic payments system were rapidly growing throughout the world, cash would remain the predominant method of making small payments in every country. “As technological innovation enhances the cost effectiveness, flexibility and ubiquity of electronic payments, with internet payment schemes…the balance of usage will continue to shift towards using electronic payments for an increasing share of transactions,” Sands wrote.
“Yet, there is no need to wait for new payment innovations. High denomination notes already play a very limited role in the legitimate economy. They account for a tiny share of transactions and are used and held by a small, wealthier sub-segment of the population,” his paper said.
Incidentally, 85 per cent of all cash in the economy was in Rs 500 and Rs 1,000 denominations as on March 2016, according to data provided by the RBI.
“This a strong step taken by the Narendra Modi government and will benefit the growth of digital payments and digital banking in India. We (MobiKwik) are excited to be a part of this historic moment,” said Bipin Preet Singh, CEO of MobiKwik.
“With this, the quantum of India’s economy moving through the digital pipes will witness massive growth. Both Snapdeal and FreeCharge are committed to supporting all such initiatives,” said Kunal Bahl, co-founder & CEO Snapdeal, which owns payments platform FreeCharge.