By Abheek Barua & Anil Katia, Barua is ex-chief economist, HDFC Bank, and Visiting Professor, Ashoka University; Katia is Director, Ducturus Advisory Services
Complaints of ATMs going “dry” in many parts of the country have increased recently, with the bulk of the complaints coming from tier-II and -III cities. This has prompted the Reserve Bank of India (RBI) to launch a nationwide review of currency distribution networks. Despite the growth of online transactions largely on the back of United Payments Interface (UPI), cash transactions still account for over 35% of all transactions in volume terms, although the lower average ticket size of these transactions reduces its share in value terms. Cash is not dead, and every effort needs to be made to ensure that it remains healthy.
The paucity of cash at distribution points can be a significant risk for the economy as a whole and the financial system. The issue is not whether sufficient currency exists in the economy. Rather, it is whether cash is available where and when citizens require it for their day-to-day transactions. Access is key. The RBI has emphasised that there is no sign of a systemic crisis. However, its review underscores the central bank’s growing concern about the access to currency rather than its overall quantity in the system, which has historically been its focus.
One could argue that as digital payments grow further, the impact of these currency shortages should structurally decline. One can envisage a scenario where cash may increasingly remain concentrated within banks, cash logistics networks, businesses, or households instead of circulating efficiently through the retail economy. As merchants rely more on digital payments, fewer of them would routinely maintain adequate cash balances, reducing cash availability within local communities. That seems like an inevitable consequence of a growing digital payments model, but leads to a somewhat worrying question. What if digital payments platforms were hit by a shock? What kind of stability risks do these pose to the financial system and indeed the broader economy?
A significant proportion of India’s retail digital payments are increasingly routed through a small number of UPI third party application providers. For millions of citizens, they have become the primary interface through which money is accessed and used. Importantly, these entities neither create money (through the credit multiplier process) nor hold deposits. The money continues to remain safely within the banking system.
The question, then, is, what happens if a major payment access provider were to suffer a prolonged operational outage, cyber incident, business failure, or market exit? The conventional approach to financial stability that central banks follow would not raise a red flag. Deposits would be safe, as would be the settlements infrastructure. Yet, millions of individuals and merchants could face significant disruption in accessing and using their money for routine economic activity. Ironically enough, as cash usage declines with digitalisation, the traditional buffer of switching to cash transactions will weaken.
This adds a new dimension to the notion of financial stability. As technology develops, the costs or the dark side of “technology” manifests in more sophisticated modes of cyberattacks. Cyber frauds multiply, and the entire chain is compounded by the growing interdependence of payment systems.
Interdependence means that a single glitch can amplify very quickly though the system. As recently as July 8, the US Federal Reserve suffered a major glitch in its payment systems — Fedwire, FedACH, and FedNow — disrupting trillions of dollars in daily transfers. This was not an isolated incident. Similar outages occurred in February 2021, June 2023, December 2024, and March this year.
Cyberattacks are perhaps bigger threats than glitches. Multiple agencies and policy makers — VISA, the International Monetary Fund, and the US treasury — have flagged the growing threat of cyberattacks targeted at payment systems; the ferocity of attacks is likely to increase as AI becomes more sophisticated. The controversy in April this year over the ability of Anthropic’s Mythos model was that it could potentially turbocharge cyberattacks on banking systems. Brazilian cybercrime group Plump Spider’s repeated attacks on Brazil’s instant payments system, Pix, operated by the central bank, is another cautionary tale.
What are the implications of all this? The future of financial regulation may not be defined solely by protecting the value or safety of money. It may increasingly be defined by ensuring uninterrupted access to it. Recognising access to money as an emerging dimension of systemic risk may therefore become one of the next important developments in financial regulation.
Three questions follow. First, should entities that have become systemically important access points to the nation’s payment system be subject to stronger requirements relating to operational resilience, recovery planning, orderly exit arrangements, and continuity of public access?
Second, instead of chasing digitalisation blindly, should policymakers devote greater attention to ensuring that cash continues to remain a viable and readily accessible fallback mechanism during periods of digital disruption?
The third and related question is whether fighting cash-access risk — the possibility that cash, despite being available in aggregate, is not readily accessible where and when citizens require it because of uneven distribution or weaknesses in the cash distribution network — should become an explicit target of financial stability policies.
With the rapid growth of AI, it can be inferred that regulation will always stay behind the curve. That is certainly not a happy thought either for depositors, investors, or the regulator. That said, the first step would be to recognise an emerging risk and weave it into the financial stability agenda.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.
