In IMTFI's PERSPECTIVES blog series, IMTFI fellows take on the recent demonetization move in India. This series aims to foster an open dialogue on issues around money, technology and financial inclusion for the world’s poor. Individual contributions reflect contributors' own reflections on recent events - based on their research and areas of expertise. The topic of demonetization will conclude with a curated commentary by IMTFI on key themes, important questions, and what we can learn from these contributions for digital financial inclusion going forward.
By IMTFI Fellow Debashis Acharya (School of Economics, University of Hyderabad)
In the early hours of November 9, 2016 as the acting finance officer of the University of Hyderabad, I got a call from a faculty colleague on the possible ways to disburse payments to a group of conference participants. The difficulty arose since INR 500 and INR 1000 notes (bills) had ceased to be legal tender following an announcement by the Prime Minister Mr. Narendra Modi. I quickly updated myself by reading the Times of India and also by speaking to the bank manager on campus. The banks had been directed to exchange old notes against new ones and set withdrawal limits (these are set from time to time). On the first day, the bankers seemed ready and confident to handle the demand for note exchanges and withdrawals. I confirmed this by calling up a banker friend handling a branch in a suburban area. To quote him, “We have received Rs1 crore worth cash of smaller denominations last evening. Though the whole move has come as a surprise we will be able to meet the cash demand." As days passed, the ATMS dried up and I could see long queues outside the branches of different banks and ATMs.
As I casually surveyed these queues, I tried not to restrict my analysis to the macro implications of demonetisation like my fellow economists. Some economists in India termed Mr. Modi’s idea of tracking down black money through this demonetisation move as a meaningless exercise and some opined that the exercise might be partially effective. The media started highlighting possible ways of laundering black money following this demonetisation announcement. As an IMTFI fellow working on cashless payment modes and prepaid cards, I started thinking more on our behavior in general and that of the rural folks in particular. The financial inclusion efforts in India have been working to ensure that everyone has a bank account and a debit card to begin with. Experiments on technology-enabled financial services and payment modes like mobile phones, wallets, prepaid cards are at different stages. How can one best describe the current situation? In my view, it is probably a transitory cash exclusion rather than financial exclusion due to demonetisation.
Irrespective of income levels, everyone depends on cash to some extent or the other. The non-cash payment technology has penetrated each and every corner of the country with reasonable awareness of mobiles, wallets, and cards. Despite the printing press working probably 24 hours to supply cash to regional vaults, there seems to be a fear of shortage among people. This fear is certainly not cutting across society equally with urban lower and middle classes among the most impacted. This has led to hoarding of cash, i.e. of new notes as well as old notes of lower denomination, which has for a while been adding to the cash crunch. As reported by the Financial Express on Nov 14, 2016, “to mitigate their hardship the Reserve Bank of India has already sent new currency notes to banks and ATMs in Jharkhand’s Bokaro by helicopters.” The report also quoted the Economic Affairs Secretary Shaktikanta Das, who said, “…it was decided to activate all channels for dispensing cash. With regard to rural areas, he said that the cash holding limit for 1.2 lakh banking correspondents (BCs) has been increased to Rs 50,000 and banks have been given flexibility to increase this limit on a case by case basis. It has been also decided to provide cash multiple times to the BCs so that the rural population is served. Besides, the supply of cash to 1.3 lakh branch post offices would be enhanced so that the public can get banknotes.”
However, the long queues seen in bank branches and ATMs in the first two weeks post demonetization may not be entirely due to the day-to-day transaction demand for cash. It’s rather a precautionary motive to hoard extra cash to avoid this transitory uncertainty. Such hoarding behavior may differ from one region to the other. I visited a relatively poorer state of India, Odisha, during Nov 9-10 and again during Nov20-24. I didn’t see any panicking crowd before ATMs and branches. The situation seemed to be quite normal. I did some intercept interviews on my way there with cab drivers and street vendors. I learned that the prices in some sectors, especially perishables including say fish, might have come down but that the whole move has been taken very positively by the public as a surgical strike on black money. The rest is all adjustment cost and a passing phase.
The perceived cash crisis has paved ways for mobile based payment apps, wallets, etc. to earn quick wins by offering discounts and luring customers to use these apps for making payments. The Modi government has declared several standard operating procedures to encourage digital payments such as reducing transaction fees for digital payments in general and waiving such fees for specific transactions. Digital/Mobile money seems to be taking off with operators like PayTM, Freecharge, and Mobikwik gaining higher market share and confidence of people, especially in urban areas. A policy-induced move towards digital payments has turned into a crisis-induced move in today’s digital India. So far, digital payments and remittances including mobile money, wallets, use of POS machines etc., have been promotional in nature as providers including government, banks, and the financial sector have worked to attract people to the benefits of these modes. This is policy induced. People adopt these modes when they are convinced of the benefits they derive from them. The perceived and actual benefits include lower transaction costs, safety, utility in making payments, and liquidity, to name the major ones. The uptake has largely depended on these factors from supply and demand sides. But since demonetization began, a sort of crisis for some, everyone is now compelled to resort to these digital modes as far as possible. In the process, then, new segments of the population are now also learning the benefits of these digital payment solutions. For instance, an Indian television advertisement shows a son pleasing his father by making utility payments from his mobile within seconds. Now, the father is inquisitive about this payment mode and follows all the advertisements in television, newspapers, and the radio. All providers have come up with their apps/solutions to attract customers. In my view, this is a crisis-induced move towards making India digitally and financially inclusive.
As I read the national daily today I am reminded of my pre-paid card project on insurance payments in Varanasi. In Hyderabad, the city where I live, the State Bank of Hyderabad in the city ordered about 3 lakh pre-paid cards to distribute to both customers and non-customers(reports Times of India on Dec 12, 2016). Luxury spending has been reduced and people have started using the cards for very small transactions such as purchasing groceries, daily essentials and fuel. These cards would work like mobile recharge for amounts of INR 50/- and below. The customers can add funds either by directly paying to banks or by adding funds online.
I also recall my research in rural Varanasi, my field site for the IMTFI project. At the time of the study, respondents were in many cases skeptical about new crisp banknotes but fine with the old well-worn or soiled notes dispensed by the ATMs because they felt these notes were trustworthy (not counterfeit). They were proud to have possessed a debit card or a pre-paid card to receive their payments and to store liquidity for a while. This was to avoid theft of cash at home or some relative requesting to borrow some cash. It was also partly to earn a little interest on such cash parked at a bank. I remember a respondent showing me a loan pass book of a different micro finance company, where some cash was ploughed back with loan repayments for some interest in return. It’s all about price and non-price convenience that these respondents derive by parting with cash but not entirely with liquidity. The interest rate being the price of money or the opportunity cost of holding cash, respondents derived price convenience by earning a little interest. The non-price convenience refers to the absence of theft, of the need to lend a family member some cash, of the burden of hiding cash in a tiny spice container in the kitchen.
How might my respondents feel now? They may not understand the big word, “demonetisation.” They may face a shortage of cash for their daily needs. Because they always preferred soiled currencies of denominations below INR 1000, I guess they will doubt more the new flashy notes of INR 2000 and INR 500 denominations dispensed either at ATMs or over the bank counters. But it’s also true that even the educated mass used to suspect the genuineness of INR 1000 notes since before demonetization these were found to be fake on a number of occasions. Rural respondents at my field site may face a temporary slowdown in their small/petty business - a kind of local deflation, I would say. Prices of the goods they sell may plummet for a few weeks until they get currency at hand and start believing that these new currency notes are genuine.
A step forward in access to and availability of expanded digital payment infrastructures might help rural folks. They should be able to receive and make payments using either a pre-paid card or a mobile. All may not have bank accounts. The provider of cards or mobile based solutions should be able to handle both types of rural folks i.e., with or without bank accounts. At best, my respondents may likely be indifferent to this demonetisation given their beliefs that new high denomination currency notes may not be genuine and their largely low volume of daily cash transactions. I am sure they will be better off going beyond cash, as envisioned by Prime Minister Modi. I will have to visit my field again to learn more from my motivated respondents, the clients of Utkarsh Micro finance limited, which is in transition to a small finance bank.
In this first weekend of January I am happy to see the shorter queues before the ATMs and bank branches in Hyderabad. The long pending demand for INR 500 notes has been met now. The recalibrated ATMs have been dispensing INR500 notes for the last two days. The ATM withdrawal limits are now revised to INR 4500 per day. This is going to curb the hoarding of cash and the hoarding of small denomination notes (the “chillar” in local language). But the digital inertia may turn into a big leap towards a cashless Indian economy. The print and electronic media are out with advertisements to this effect on a daily basis.
To sum up, this move by Mr. Modi, though originally aimed at curbing black money and increasing tax collections, has now become a crisis-led digital-financial inclusion drive. This has acted as a positive shock and game changer in instilling confidence among the lower strata to go digital. However, the success and sustainability of this move depends on the supporting infrastructure, both technological and financial. Needless to emphasize that the financial service providers in this digital payment segment have turned this cash crisis into an opportunity to scale up their technology-led payment services and products. But the occasional reporting on frauds and cyber-attacks in the media has the potential to discourage people from using digital modes of payment, including internet banking. The net result will depend on how the financial system faces these challenges. I will have to wait for numbers about uptake of digital payment services and on incidents of fraud to have further evidence, aspects of which I will address in an upcoming post on model cashless villages around Hyderabad, similar to the subject of my IMTFI study in Varanasi, Uttar Pradesh.
Read more about Debashis Acharya's IMTFI research here
By IMTFI Fellow Debashis Acharya (School of Economics, University of Hyderabad)
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| Source: The Hindu Business Line (Nov 13, 2016) |
As I casually surveyed these queues, I tried not to restrict my analysis to the macro implications of demonetisation like my fellow economists. Some economists in India termed Mr. Modi’s idea of tracking down black money through this demonetisation move as a meaningless exercise and some opined that the exercise might be partially effective. The media started highlighting possible ways of laundering black money following this demonetisation announcement. As an IMTFI fellow working on cashless payment modes and prepaid cards, I started thinking more on our behavior in general and that of the rural folks in particular. The financial inclusion efforts in India have been working to ensure that everyone has a bank account and a debit card to begin with. Experiments on technology-enabled financial services and payment modes like mobile phones, wallets, prepaid cards are at different stages. How can one best describe the current situation? In my view, it is probably a transitory cash exclusion rather than financial exclusion due to demonetisation.
Irrespective of income levels, everyone depends on cash to some extent or the other. The non-cash payment technology has penetrated each and every corner of the country with reasonable awareness of mobiles, wallets, and cards. Despite the printing press working probably 24 hours to supply cash to regional vaults, there seems to be a fear of shortage among people. This fear is certainly not cutting across society equally with urban lower and middle classes among the most impacted. This has led to hoarding of cash, i.e. of new notes as well as old notes of lower denomination, which has for a while been adding to the cash crunch. As reported by the Financial Express on Nov 14, 2016, “to mitigate their hardship the Reserve Bank of India has already sent new currency notes to banks and ATMs in Jharkhand’s Bokaro by helicopters.” The report also quoted the Economic Affairs Secretary Shaktikanta Das, who said, “…it was decided to activate all channels for dispensing cash. With regard to rural areas, he said that the cash holding limit for 1.2 lakh banking correspondents (BCs) has been increased to Rs 50,000 and banks have been given flexibility to increase this limit on a case by case basis. It has been also decided to provide cash multiple times to the BCs so that the rural population is served. Besides, the supply of cash to 1.3 lakh branch post offices would be enhanced so that the public can get banknotes.”
However, the long queues seen in bank branches and ATMs in the first two weeks post demonetization may not be entirely due to the day-to-day transaction demand for cash. It’s rather a precautionary motive to hoard extra cash to avoid this transitory uncertainty. Such hoarding behavior may differ from one region to the other. I visited a relatively poorer state of India, Odisha, during Nov 9-10 and again during Nov20-24. I didn’t see any panicking crowd before ATMs and branches. The situation seemed to be quite normal. I did some intercept interviews on my way there with cab drivers and street vendors. I learned that the prices in some sectors, especially perishables including say fish, might have come down but that the whole move has been taken very positively by the public as a surgical strike on black money. The rest is all adjustment cost and a passing phase.
The perceived cash crisis has paved ways for mobile based payment apps, wallets, etc. to earn quick wins by offering discounts and luring customers to use these apps for making payments. The Modi government has declared several standard operating procedures to encourage digital payments such as reducing transaction fees for digital payments in general and waiving such fees for specific transactions. Digital/Mobile money seems to be taking off with operators like PayTM, Freecharge, and Mobikwik gaining higher market share and confidence of people, especially in urban areas. A policy-induced move towards digital payments has turned into a crisis-induced move in today’s digital India. So far, digital payments and remittances including mobile money, wallets, use of POS machines etc., have been promotional in nature as providers including government, banks, and the financial sector have worked to attract people to the benefits of these modes. This is policy induced. People adopt these modes when they are convinced of the benefits they derive from them. The perceived and actual benefits include lower transaction costs, safety, utility in making payments, and liquidity, to name the major ones. The uptake has largely depended on these factors from supply and demand sides. But since demonetization began, a sort of crisis for some, everyone is now compelled to resort to these digital modes as far as possible. In the process, then, new segments of the population are now also learning the benefits of these digital payment solutions. For instance, an Indian television advertisement shows a son pleasing his father by making utility payments from his mobile within seconds. Now, the father is inquisitive about this payment mode and follows all the advertisements in television, newspapers, and the radio. All providers have come up with their apps/solutions to attract customers. In my view, this is a crisis-induced move towards making India digitally and financially inclusive.
 |
| Source: Mint E-paper Dec 29, 2016 |
I also recall my research in rural Varanasi, my field site for the IMTFI project. At the time of the study, respondents were in many cases skeptical about new crisp banknotes but fine with the old well-worn or soiled notes dispensed by the ATMs because they felt these notes were trustworthy (not counterfeit). They were proud to have possessed a debit card or a pre-paid card to receive their payments and to store liquidity for a while. This was to avoid theft of cash at home or some relative requesting to borrow some cash. It was also partly to earn a little interest on such cash parked at a bank. I remember a respondent showing me a loan pass book of a different micro finance company, where some cash was ploughed back with loan repayments for some interest in return. It’s all about price and non-price convenience that these respondents derive by parting with cash but not entirely with liquidity. The interest rate being the price of money or the opportunity cost of holding cash, respondents derived price convenience by earning a little interest. The non-price convenience refers to the absence of theft, of the need to lend a family member some cash, of the burden of hiding cash in a tiny spice container in the kitchen.
How might my respondents feel now? They may not understand the big word, “demonetisation.” They may face a shortage of cash for their daily needs. Because they always preferred soiled currencies of denominations below INR 1000, I guess they will doubt more the new flashy notes of INR 2000 and INR 500 denominations dispensed either at ATMs or over the bank counters. But it’s also true that even the educated mass used to suspect the genuineness of INR 1000 notes since before demonetization these were found to be fake on a number of occasions. Rural respondents at my field site may face a temporary slowdown in their small/petty business - a kind of local deflation, I would say. Prices of the goods they sell may plummet for a few weeks until they get currency at hand and start believing that these new currency notes are genuine.
A step forward in access to and availability of expanded digital payment infrastructures might help rural folks. They should be able to receive and make payments using either a pre-paid card or a mobile. All may not have bank accounts. The provider of cards or mobile based solutions should be able to handle both types of rural folks i.e., with or without bank accounts. At best, my respondents may likely be indifferent to this demonetisation given their beliefs that new high denomination currency notes may not be genuine and their largely low volume of daily cash transactions. I am sure they will be better off going beyond cash, as envisioned by Prime Minister Modi. I will have to visit my field again to learn more from my motivated respondents, the clients of Utkarsh Micro finance limited, which is in transition to a small finance bank.
 |
| A short queue in an ATM in Lingampally, Hyderabad on Jan 4, 2017 (photo by author) |
To sum up, this move by Mr. Modi, though originally aimed at curbing black money and increasing tax collections, has now become a crisis-led digital-financial inclusion drive. This has acted as a positive shock and game changer in instilling confidence among the lower strata to go digital. However, the success and sustainability of this move depends on the supporting infrastructure, both technological and financial. Needless to emphasize that the financial service providers in this digital payment segment have turned this cash crisis into an opportunity to scale up their technology-led payment services and products. But the occasional reporting on frauds and cyber-attacks in the media has the potential to discourage people from using digital modes of payment, including internet banking. The net result will depend on how the financial system faces these challenges. I will have to wait for numbers about uptake of digital payment services and on incidents of fraud to have further evidence, aspects of which I will address in an upcoming post on model cashless villages around Hyderabad, similar to the subject of my IMTFI study in Varanasi, Uttar Pradesh.
Read more about Debashis Acharya's IMTFI research here
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