One of the payoffs to the massive exercise of “withdrawal of legal tender character” of high denomination notes is the hope of transiting to a less-cash transactional economy.
One of the payoffs to the massive exercise of “withdrawal of legal tender character” of high denomination notes is the hope of transiting to a less-cash transactional economy. In the immediate aftermath of the restricted cash availability, there has been a significant increase in certain channels of electronic retail transactions, according to daily data RBI has started releasing.
Caveat: The data for November and December is not comparable to earlier months, being based on a sample and not a larger set (October 2016 being the last month for which these numbers are available). Compared to November 2016 (and to averages of earlier months), the following acceleration is seen. First, USSD is the medium of payment for folks who do not have smart phones or internet, using the older Nokia-like feature phones, using GSM technology, with just the capability of receiving OTP codes. This is the primary medium of payments for low-income households and rural areas. The Immediate Payment Service (IMPS) is a similar ATM-based channel. The numbers are still minuscule compared to the other channels. Yet … total daily payments via USSD phones rose from an average R2.4 lakh in November 2016 to R17.2 lakh in December, 606% month-on-month (MoM).
The other remarkable increase was in the Unified Payments Interface (UPI) channel, the remarkable innovation engineered by the National Payments Corporation of India (NPCI). This is the smartphone equivalent of USSD/IMPS, and far more functional. Total daily average transactions have risen from R3 crore (R30 million) in November 2016 to R15.6 crore in December 2016, 417% MoM.
To provide perspective, average IMPS payments per month had risen 127% MoM during April-October 2016 over the corresponding seven months of 2015, and mobile transactions, by 246%. The shift from IMPS, to USSD and UPI (more digital in nature, although the end-use transaction is still not very clear) is probably the most tangible evidence of the human capacity to adapt to changed circumstances.
The flip side to this narrative is the extent of cash restrictions having affected transfers, particularly domestic remittances. Prior to the cash squeeze, IMPS transfers average R25,900 crore per month during April-October 2016 (up from R11,400 crore (R114 billion) for the same seven months in 2015). This plummeted to R1,100 crore in November 2016, in the immediate aftermath of the currency move, rising marginally to R1,400 crore in December.
Transactions on other, more significant, channels have also increased, less dramatically. Debit and credit card usage at PoS/card-swipe machines are up a modest 27% MoM in December 2016, wallets up 45%, bank mobile payments only 2% (time trends over 2016 and 2015 are not comparable).
The inference is that lower-income families have changed behaviour, probably by compulsion, more significantly than higher-income households.
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So, what lies in store for moving to a formal, digital economy over the next couple of years? First, the financial inclusion story, from a banking perspective, is largely done. Prior to the currency changeover, there were 25-crore-odd Jan-Dhan Yojana (PMJDY) accounts (credit to the government, one of the most remarkable “banking the unbanked” initiatives ever seen), of which around 5 crore were zero-balance accounts (i.e, 20 crore active accounts). Assuming that only 15 crore were functional accounts, with an average household size of 4.5 persons, this might translate (after de-duplication) to roughly 60 crore (600 million) distinct persons. If 70% of India’s 120 crore (1.2 billion) population is considered significantly low-income, that’s 84 crore people, so PMJDY coverage is now 75%. Commercial banks are unlikely to expand coverage significantly, so the new institutions (payments and small banks, NBFCs, MFIs) need to be the next bridge for last-mile access.
More critically, as the FY16 Budget emphasised, “funding the unfunded” will be the next move up. The millions of tiny enterprises which form the core of economic and transactional activity need access to less costly, lower interest rate, formal finance. The really small service provider, the morning vegetable vendor, probably pays annual interest rates of over 4,000%. The expansion of e-commerce platforms and marketplaces, and the increasing Uberisation of many service economies, is beginning to pull merchants—both manufacturers and services—into a data trail, which builds potential credit histories, allowing formal financial channels to engage in micro credit delivery.
A combination of policy interventions, however imperfect, and digital transformations is setting the stage for the next move up in India’s sustainable growth trajectory.
(With inputs from Abhay More)