In India, cash is king. The persistence of cash as a percentage in the value of consumer payments in India is 68% versus 14% in the US and 11% in the UK. This dominance of cash transactions comes at a cost, with the RBI and commercial banks spending Rs 21,000 crore annually in currency operations. It is opaque, facilitates tax evasion and is generally system inefficient. The biggest challenge before payments banks(which essentially promote financial inclusion by making it easier to set up an account) is to get this cash routed through formal banking channels, mostly electronic, and thus start a silent revolution to dethrone the king of inefficient times — cash.
But for this, the whole ecosystem and operative environment need to change in order to enhance the functional effectiveness of payments banks in leading a migration towards a less-cash economy.
1. First and foremost, there has to be a move away from traditional multiple forms and documentation. Account opening, the first step, should be paperless – this applies to paperwork from those seeking an account as well as that given banks (passbook/cheque book etc). The new ecosystem should comprise eKYC using Aadhar and integrate with other digital initiatives like Digi lockers, e-signature etc. All the receipts and payments need to be paperless and communicated and stored electronically.
“A more conducive environment that enhances the functional capabilities of payments banks will boost their efforts to take digital banking to the last mile and serve the bottom of the pyramid…”
2. The government is a principal cash dispenser at various levels to persons, such as for payment of wages, subsidies, benefits etc. The base operating units like Blocks and Panchayats and Treasuries should migrate to a zero-cash budgeting in a defined time frame.
3. The rural landscape is dominated by agrarian economy and layers of informal sectors. All transactions involving agrarian input and output may be brought into the institutional formal sector by multi-layer initiatives.
4. Creating an electronic platform and developing appropriate technology requires deep investment. All the collateral benefit goes to various stockholders in society. Hence a proper incentive structure may be put in place to encourage such long-term investments, which should be generally in line with incentives available for investment in the infrastructure sector.
5. All cash/ paper transactions may be discouraged by building up some charges; conversely, incentives can be built around paperless payments in the form of concessions.
So far, pre-paid instruments (PPI), digital wallets and acceleration in the e-commerce space have laid a foundation for use of non-cash instruments/utilities and developing payment getaways. Payments banks have the challenge to take it to the next level. They need disruptive technologies and innovative solutions to the needs of different segments, represented by a wide range of consumers – from an upwardly mobile IT professional to a migrant labourer, from a widow staying in a hamlet to a government officer in Lutyens’ Delhi.
The challenge is to build appropriate technology across devices and platforms, which can work seamlessly in challenging environments – such as in places without even basic necessities like electricity. The most effective role is to be played by the lowest common denominator like a plain mobile phone (now estimated to have a subscriber base of 933 million — almost one phone for every adult on an average now). The banks have also to reach their message and services through social media like Facebook (which now has about 112 million users in India).
The Reserve Bank of India has taken a positive step in liberally granting licences for setting up payments banks as a step up to its earlier several efforts in facilitating electronic and web payments. In its present guidelines for payment banks, it could go a step further by relaxing some of the operational restrictions. Payments banks now can accept demand deposits, not time deposits. Household savings constitute a major source of resource mobilisation to accelerate GDP. Besides, poor families in villages save small sums as and when they can over a long time for education/marriage/medical treatments and other emergencies. If the bottom of the pyramid has to move from one set of banks to another set of banks for even their deposit needs, it may create avoidable inconvenience.
Besides, the ceiling of deposit a person can have with payments banks is Rs 1 lakh, 75% of which has to be invested in government-approved securities and the rest with banks as deposits. If a substantial part of the funds raised by payments bnks is investment in government securities only, the Rs 1 lakh limit per depositor looks restrictive.
A more conducive environment that enhances the functional capabilities of payments banks will boost their efforts to take digital banking to the last mile and serve the bottom of the pyramid and in the process, simultaneously lead to a stage where non-cash transactions will outnumber cash ones. Ultimately cash will get relegated to the position of a legal tender with sovereign backing.