Money-changers face a third wave and a future shock

B S Srinivasalu Reddy

Money changers may well be short-changed. The Reserve Bank of India’s (RBI) move to do away with the need for endorsing forex releases by money changers will not just add to an increase in the level of forex allowed to be carried overseas and give an unexpected boost to the industry. For the $2 billion money-changers’ business, it may will mean otherwise.

Says Thomas Cook (India) Ltd’s national manager-forex operations, Aashutosh Akshikar: “The industry is replete with small players who would not be in a position to meet the demand needs at higher levels. It will lead to a shakeout in the industry.”

And just what will trigger it? Forex allowed to be carried by a traveller has been increased to $5,000 with a higher cash component of up to $2,000 now. These numbers were at $3,000 and $500 respectively since 1998. And unlike in the past, when small operators used to source business first and arrange for the cash with the customers money, it would be difficult to manage to service a group of five persons taking $2,000 each. “The money changer must be able to cut a cheque for Rs 4.5 lakh in one shot to buy currency. This will tilt the advantage in favour of a bigger player,” Akshikar explains.

Agrees Kanji Money Changers Pvt Ltd, Bharat Shah: “This need for keeping a higher inventory of cash calls for more capital not only to buy cash, but also travellers cheques. The need to maintain higher cash inventory has its associated costs, adding to the burden on the smaller player.”

However, there is no shortage in the cash supply to meet the additional demand. “There is a 60 per cent inflow while the outflow is only 40 per cent of the forex movement. In fact, we are exporting $500,000 to $1 million per day as of now. If there is an additional demand, we will sell them in India itself,” says Mr Akshikar.

The September 11 terrorist attacks on World Trade Centre towers has also cast its shadow on the business. Add on signs of a slow down in global economy. “Both put together will lead to stagnation in the volumes of business for money changers during the current fiscal even though the industry has doubled its volumes during the last three years,” says Mr Shah.

As Mr Akshikar says, in October 2001 — the first full month after the US incidents — there was a fall in overseas travel numbers by 30-35 per cent. Corporate travel business has come down by 20 to 30 per cent. However, there has not been much of an impact on the forex business per se. November figures would tell the true story.

However, rise in currency demand would not affect the demand for travellers cheques, feels Mr Akshikar. “We see the exchange currency market growing by 10-12 per cent this year. But it will not cannibalise travellers cheque market as it is already known among the tourists as a safer way,” he says.

Says LKP Forex president, Parag Mehta: “Though the industry is having about 1,500 players, only 12 of them have more than 10 branches network across the country.” In the top slot, there are three players with over 25 branches — Thomas Cook, LKP Forex, and Trade Wings. Those with more than 10 branches include Tata-Amex Finance, Wallstreet, TT Tradeals, Pheroze Framroze, Weissman Finance, Cox & Kings, and Nucleus Finance.

It all started during the Manmohan Singh’s era as the Union finance minister. The RBI initiated liberalisation of money changers business, which had only a handful of players in March 1992. And because of this easing, many took a fancy for this businesses: the total number of players went over 4,000 by 1995-96, which could be called the first wave for the money changers.

But with the unprecedented rise in number of players without commensurate growth in forex business, many dubious money changers came into play.

After studying the scenario for two years, the RBI tightened the regulatory noose in 1999 by increasing the minimum capital base prescribed for money changers to Rs 25 lakh from Rs 10 lakh earlier.
“This resulted in the closing shop of garage or balcony operators and brought down the number of players to about 1,500,” says Mr Akshikar adding the third wave would bring it down even further.

Just covering the regulatory constraints is not enough. Money changers will have to tackle international credit cards, which are becoming their competitors. The rising number of credit, debit and smart cards is threatening to make travellers-cheques redundant. The big question: will plastic, which is in a nascent stage in most of the Asian countries, including India, obliterate money changers in the future? Only time will tell.