Monday, February 13, 2017

Special PERSPECTIVES Series on Demonetization in India: The Recent Indian Demonetization and Cash Exclusion (Part 2)

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 Debashis Acharya, V V Subbarao, and T K Venkatachalapathy, School of Economics, University of Hyderabad

Mr. A Kalyan Kumar and Mr. A Nagesh “Bank Mitras” of Allahabad Bank,
demonstrating the use of D180 MPOS terminal and Evolute Impress biometric
 reader for cashless transactions in the village.  (Photo by V V Subbarao)

It’s been two weeks since I (Debashis) summarized the recent demonetization move as a crisis-led financial inclusion drive in the first part of this blog. Since then, we (myself with V V Subbarao, and T K Venkatachalapathy) have been following the trends in uptake of digital payments at the national level and the efforts of the local government, i.e. Government of Telangana. The Government of Telangana has been working on furthering this national effort towards a more cashless economy. The experiment has begun in more than twenty villages and these villages have been declared to be cashless villages.1 The report of the committee on digital payments – chaired by a former finance secretary, the Government. of India, and the present principal advisor to NITI Ayog, Government of India – is now in the public domain.2 Before we discuss one of these cashless villages around Hyderabad, let us look at the trends in digital payments before and after demonetization. Though, it’s too short a period to assess the impact per se, the trends in such payments can provide some insights.

The recent data on digital payments published by the Reserve Bank of India (RBI) indicate sharp growth in pre-paid instruments (PPIs) as alternative to cash payments. The PPIs as compiled by the RBI include m-Wallet, PPI cards, and paper vouchers. Payment by m-Wallet is the highest over the financial years 2012-13 to 2016-17, followed by PPI cards and paper vouchers, both in terms of volume of transactions and value of transactions. The figures 1 and 2 plot these trends in PPI based on uptake in digital payments. It’s worth looking at the daily transactions data on PPIs published by the RBI to judge the incidence and possible impact in the future to go cashless. The data on PPIs have been made available, effective from 2010. Data on other digital/electronic payments are available from 2004-05. The apex bank has even been alert to daily transactions through digital modes, effective from Jan 1, 2017.

The objective of generating and compiling such data, as well as keeping it in the public domain, reflects the vision and policy expectations of the current regime and the apex bank. The Government of India has just approved a grand digital literacy program – named Pradhan Mantri Digital Sakshrata Abhiyan(PMDISHA) – for six crore rural households on Feb 9, 2017 (reports Business Standard).3 Figure 3 shows an increasing trend in the daily value of PPI transactions. Here, one sees an increasing trend, even though cash has increasingly been made available on a daily basis over the last two months. In addition to these modes, one could transfer money from one’s account in any bank to another account in any bank through Aadhar Enabled Payment System (AEPS) or PIN PAD using ATM PIN. For instance, AEPS transactions are done using Evolute-Impress biometric machines and the PIN PAD transactions are done using D180 mPOS machines in villages near Hyderabad. We don’t have disaggregated data on such transactions at the moment.

Figure-1 Uptake of Digital Payments by Pre Paid Instruments (Volume of Transactions)

Based on data from the Database on Indian Economy, Reserve Bank of India, 2017.

Figure-2 Uptake of Digital Payments by Pre Paid Instruments (Value of Transactions)

Based on data from the Database on Indian Economy, Reserve Bank of India, 2017.

Figure3: Trend in Daily value of PPI transactions in Dec 2016 and Jan 2017

Let us now turn to some local stories around Hyderabad on cashless village experiments by the local government bodies. As reported by a national daily, the Hindustan Times,4 the first village to go cashless has been Ibrahimpur, 125 kilometers from Hyderabad. Andhra Bank, a public sector bank, has ensured that all villagers have bank accounts and debit cards. The report also notes that some women in the village said they are happier than before with their debit cards since they don’t have the fear of parting with cash for their husband’s buying of alcohol.

The first grocery store in Kasala, as we enter the cashless village.
(Photo by V V Subbarao)
To supplement the macro figures reported above and to learn more on the above said cashless village experiments, we just visited Kasala, a village in the district of Sangareddy, about 60 kilometers from Hyderabad, to study the ongoing cashless experiment. The district administration has declared this village a cashless village. The office of the Collector of this district has had discussions with the Village head and people to promote cashless transactions. As we entered the village the first Grocery store we encountered displayed in the form of a pamphlet an appeal to the villagers to adopt cashless modes of payment,  i.e. through mobile wallet, paytm, and bank account.

This grocer had to manage his payments to the wholesaler by visiting the bank branch, or though the “Bank Mitra” (representative)5 of the village, to procure grocery for his retail outlet in the village. He transferred money to the wholesaler’s account from his account since cash was not available. Before demonetization he preferred cash transactions to the transfers mentioned above. Similarly, the villagers transferred funds to the grocer’s account through Bank Mitras and bought their grocery by producing charge slips given by the Bank Mitras. This was due to lack of cash at hand and for small transactions starting at Rs.200/-. Bank Mitras have been working as business correspondent agents even before demonetization to facilitate financial literacy and awareness on banking, including transactions such as deposits, remittances and withdrawals, etc. They have worked in a variety of ways to bridge the distance between the village and a brick and mortar bank branch. Their importance seems to have only increased after demonetization. However, mobile-based transactions have been very few to date, according to the grocer.

Pamphlet to adopt cashless payments
(Photo by V V Subbarao)
We had an opportunity to interact with the Bank Mitras of Kasala and two other villages nearby. To quote Mr. A Kalayan Kumar, “Bank Mitra” of Allahabad Bank serving Kasala, “The total transactions, post demonetization until Dec 31, 2016, amounted to Rs. 49 lakhs for about 1047 transactions. The transactions per head has been approximately Rs. 4680/-. Before demonetization the transactions used to be Rs.300-400/- per month, amounting to Rs.2 lakhs.” At present, the cost of two of these machines – i.e. a laptop and the Evolute Impress biometric reader – are borne by the Bank. But the Bank Mitra pays about Rs.5000/- for the PIN PAD i.e. D180mPOS, which is used to swipe ATM-Debit cards. An increase in cashless transactions shall prove to be lucrative for the Bank Mitras, given the fact that cashless transactions have increased after this digital push. In villages, Bank Mitras never made a living on the banking activities alone. They used to engage in other economic activities for their livelihood. This could be due to different reasons. Bank Mitras usually get a fixed monthly remuneration and the rest of their earning is commission-based, i.e. a fraction of the transactions they carry out. The commission differs from bank to bank. Hence, Bank Mitras may see a bigger volume of transactions if this digital push is sustained in the days to come and their earnings from commission may increase.

There was some skepticism on the part of the Public Distribution System (PDS) agents, other businessmen, and farmers we interviewed in Kasala. According to Mr. Kalyan and Mr. Nagesh (Bank Mitras), out of 3000 households in the village about 40% preferred cash to cashless transactions, post demonetization, even in spite of the promotional efforts of the local government to go cashless. The PDS agents and businessmen, including grocers, were concerned about the fixed and variable costs of PoS machines needed for cashless transactions. To quote another grocer:

“It’s difficult to invest Rs.10,000/- for one PoS machine on my part and pay a monthly rent of Rs800/-. Why can’t the government bear this cost for at least two grocers in this village? This will instill confidence among us and the users too. We won’t mind paying for this once we realize the benefits.” 

The PDS agent expressed his concern in a similar tone. But the farmers had a tough time paying wages to the laborers due to the daily withdrawal limits. Even though most of them had bank accounts, laborers did not know how to use the ATM card. Although there is no fear on the part of the grocers, small businessmen, farmers, and PDS agents to go cashless and adopt digital payments, the fixed and variable costs of PoS machines seem to be an impediment for sustaining this digital drive in the long run.

As we returned from Kasala, we saw an announcement by the National Bank for Agriculture and Rural Development (NABARD) in favor of some stakeholders, i.e. the PDS agents. The Indian express on February 6 reported:

“In a major push for cashless transactions, PoS machines for credit/debit cards, as well as Aadhaar-based transactions, will be installed at all PDS shops and fertilizer depots over the next few months. In an interview to PTI, Finance Secretary Ashok Lavasa said over 1.7 lakh PoS machines have already been installed at public distribution system (PDS) shops and more will be done in the next few months. ... NABARD has committed to supporting banks through the Financial Inclusion Fund for deployment of up to two PoS devices per village, to cover one lakh villages of tier 5 and 6 areas.”6

The PDS shops have been transacting in cash to date. This announcement is aimed at digitizing a particular segment - i.e. PDS shops and the fertilizer depots - providing free PoS machines as an incentive to induce uptake of digital payments.

The crisis of cash exclusion seems to be turning into an opportunity for businesses, households, and also for the government. Here, business refers to those engaged in the digital payment business who are taking advantage of this digital push. The households partly benefit since they don’t have to keep all the cash with them at a given point of time, thereby avoiding involuntary lending of the extra cash or the risk of theft. The government benefits from transparency in the transfer of benefits.

With “Bank Mitras,”Farmers, and a PDS agent in Kasla village,
Sangareddy District, Telangana. (Photo by V V Subbarao)

What is the future of cashless payments in India? Is this digital inclusion sustainable? The report of the committee on digital payments submitted to the Finance Minister7 cites the high cost of cash as one of the key factors for going digital. To quote the report, “India's dependency on cash imposes an estimated cost of approximately INR 21,000 Crores on account of various aspects of currency operations, including the cost of printing new currency, costs of currency chest, costs of maintaining supply to ATM networks, and interest accrued. Transitioning to digital payments for government payments alone could save Rs. 100,000 crores annually with the cost of transition estimated at Rs.60, 000 to Rs.70,000 crores." However, it is difficult to predict anything clearly either from our macro figures or our brief study of Kasala. For instance, the modalities of a cashless village and the underlying incentives to go cashless seem to be ambiguous in our study of Kasala. There have been two meetings held by district administration with the households and village head in Kasala. The PoS machines have not reached either the grocers or the PDS agents. There is no clarity on the sharing of costs of the machines and the rentals of the machines. Further, the cost discussed in the report of the committee on digital payments may be limited in its scope. The variety of payment options have suddenly gone up in the post demonetization phase. Therefore, the costs associated with different payment options may be different.

The government seems to be transitioning to payments based on Aadhar issued by the Unique Identification Authority of India and the BHIM app simply to reduce costs. These options interfere with the existing big players like VISA and MASTER Card. A point worth noting is that of investment in security innovation. These two big players invest a lot on security and continuously innovate on security features to avoid frauds. How feasible is it for the Government of India to invest in security innovation? Without security and coming to an understanding with these big players, it may be difficult for the Government to sustain this move. I am also reminded of my pre-paid card project and issue of preference for soiled notes by villagers here. Technology needs to be trusted by people in terms of its immediate and long term benefits. A sudden surge in payment options may confuse potential users too.      

Let us sum up our discussion of the macro figures mentioned above on digital payment uptake and our field observations in Kasala. The sustainability of digital payments, from the supply side, will largely depend on savings in terms of cost to the economy. However, not clear at this stage are the cost calculations associated with a broad spectrum of payment options. The voices from our field clearly indicate the need for clarity on cost savings for different stakeholders. For instance, the grocer wants to understand clearly the model of cost sharing and the benefits to be derived. The Bank Mitras are of the opinion that financial literacy drives led by outsiders such as NGOs work better in improving uptake of digital payments. Finally, sustainability may well depend on customized digital payment modes winning the trust of users. This is especially important when the overall infrastructure is not geared up to provide seamless service of a particular digital payment  (such as mobile wallets that are not functioning due to poor networks) and PoS machines failing due to link failures. We will need to allow some time to see how these challenges are addressed in the near future -  and how diverse stakeholders respond.  

For part one of this post, see here


2 Report of the committee on Digital Payments, Ministry of Finance, Govt. of India, December, 2016



 5 Bank Mitra is a representative of the bank. He is available in the village with a laptop, D180 mPOS, and Evolute Impress biometric reader to facilitate digital payments. In this village the Bank mitra serves about 3000 villagers.


7 Report of the committee on Digital Payments, Ministry of Finance, Govt. of India, December, 2016

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