Financial Inclusion Post Demonetisation in India
The demonetisation of old high denomination notes (OHDs) of Rs. 500 and Rs. 1000 has led to a combination of praise and criticism of the government. The hardships faced by people in line to exchange cash or deposits is undeniable. This is only worse in semi-urban and rural areas with lower density of bank branches. There has been a definite increase in cashless transactions (see companion article: Cashless & Demonetisation...). Hindu BusinessLine (with Innovati) reports Tier 2 and Tier 3 cities seeing a greater percentage surge in card swipes.
Innovations such as wallet-on-demand (to replace cash-on-demand for e-commerce transactions), mobile ATMs and POS app (though it was pulled back on privacy concerns) are expanding footprint the financial systems and giving a more comfort feeling / convenience sense to the aam aadmi (common man). Oxigen and RBL bank have partnered on a micro-ATM initiative to deliver cash and take in old notes as deposit at your doorstep! Even though some of these innovations are more urban oriented, these concepts such as mobile ATM, POS app have the potential to meaningfully reach rural / semi-urban masses as well.
A comparison on commission fees (costs) of different cashless modes is shown below: (hat tip Hindu BusinessLine). A detailed article on Universal Payments Interface (UPI) and cashless finance possibilities is here. UPI transfers money from a bank account to bank account (so you don't lose interest on the float or have to pay a transaction cost to get it back into a bank account), and its transaction costs are low (eg: 0.45 Rs per transaction initially as per NPCI). Since the transaction cost is government-led it will be far lower than other cashless modes such as bank networks (eg: VISA, mastercard), mobile wallets, POS machines/cards etc. This has the potential to drive up the cashless economy and smaller transactions (eg: less than 100Rs) onto cashless.
A recent directive that the remaining OHD notes can only be deposited into bank accounts has led to a drive to open bank accounts.
Rural Scenario:Financial Inclusion and Demonetisation
What we have seen above is a drive towards cashless and inclusion in urban areas. What about rural areas? If you look at the pyramid figure of levels of financial inclusion in states, many of the states with lower levels of financial inclusion, almost by definition have an entrenched cash economy.
Clearly there has been a shock in rural cash-driven economies. A number of anecdotal stories are emerging:
Hindu BusinessLine reports that Kolar, Asia's #2 tomato market has no bank or ATM. “The nearest ATM/bank branch is 1.5-2 km away. My workers are spending more time at long queues in banks to withdraw money. We immediately need a bank here. Also, there’s a need for an awareness drive among farmers on using bank facilities,” a trader said. This is an example of the dominance of cash economies, and the lack of banking or ATM infrastructure in economically key locations. As a result, the largely cash-driven farm and rural economy is facing stress, loss of bargaining power with traders on the short run. Some mandis are anecdotally still trading in old OHD Rs. 500 and Rs. 1000 notes.
LiveMint reports stresses in farm supply chains and in key trading locations like Agricultural Produce Marketing Committee (APMC) mandis. The govenment has come in with a number of relief measured via NABARD (Rs. 21K crores to district cooperative banks). Informal short term extension of credit is common place.
Microfinance institutions have seen significant stresses and had temporarily suspended disbursements due to unavailability of small notes. Since repayments via old notes was possible, it put a damper on that as well. RBI has allowed temporary 60-day relief in recognition of NPAs on loans.
Jute suppliers were paid in cash and faced a challenge. Now 80-odd jute mills are likely to pay 21 lakh jute farmers electronically and help them setup bank accounts.
What about Jan Dhan accounts?
Jan Dhan accounts have been opened on a war footing in the last 2+ years, but a significant fraction (22%) of them are zero-balance pre-demonetisation, even though the trend was declining (see below). Jan dhan accounts have seen a surge of deposits which in part is suspected to be benami deposits.
Rupay cards (kisan cards) have been issued to farmers and rural folks against their bank accounts. But they have been reluctant to use it, in part because there are not many PoS machines. As the Tier 2 and Tier 3 urban experience shows (as discussed earlier), it is likely that with deployment of convenient and ergonomic options, the usage may grow. The network of ATMs and branches is sparser, though micro-ATMs and bank correspondents (BC), also called Bank Mitrs are being mobilised.
National Unified USSD Platform (NUUP) is a way to deliver mobile banking to non-smartphones, i.e. ordinary mobiles and feature phones based upon 2G USSD technology. Multi-lingual codes are also available from banks.
Summary
Beyond technological innovation, distribution channels being mobilized, it is cultural change that has emerged as a leading barrier for financial inclusion. While the demonetisation dislocation is a huge opportunity driving people into bank accounts and using them at least once, it will be a journey that is a combination of secure technological options that people trust, deeper penetration of smartphones and easy-for rural-use mobile cashless & banking options, and social/behavioral change that will drive progress. The network effect of adoption and acceptance of cashless modes will drive up usage. The importance of political dimensions on a state by state level cannot be underestimated.
Cashless transactions is only the first step. Financial literacy is key. Taking a loan to finance consumption and layering multiple loans is bad. Taking a loan to handle emergencies, and having an ability to generate cash to repay is better. The best is to take financing to build capital that will yield returns higher than the loan servicing costs and interest rates. Taking a 25% interest-rate loan to finance an activity with RoI of less than 25% is not going to generate wealth. How many economic activities exist that give 25% RoI, especially when run by the common man or woman? Don't they also be taught how to manage economic activities to drive up RoI beyond the interest rate (for the self-serving goal of being repaid, and the social goal of truly building wealth after repayment is done?).
That said, UPI and cashless / mobile modes promise to reduce transaction costs, and with sophisticated risk analytics, we could lay the foundation for much lower costs of credit and transactions in India. Combined with financial literacy and appropriate risk management, and productivity / capital creation initiatives, there is a real chance for enterprises to scalably raise rural (and urban poor) well being much faster.
Twitter: @shivkuma_k
ps: Related posts on "Cashless Finance & Universal Payment Interface (UPI)" , "Cashless boosted by demonetisation ...", "Barter & Cash to Cashless & Blockchain... " , "Service vs As-a-Service ... "
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Sri Shivkumar KalyanaRAMAN ji ji, for ages in people lived happily with out electricity and bus transport. Then came transport, result was most of them become daily wage worker in town and city. Agriculture is taken massive beating . ( this we did find during our student days in IIT-B via GRA) In the case of electricity, yes there is use but not much until it is put in pump water for irrigation. After do much of hard-work to raise and harvest, it is not tough for them to store their surplus which will be used for next year. In this process, they no need to pay 2% to middle man /company or stand in LOOOOOOOOOOOOOOOOONG line to take their own money for next season to buy things for farming. All with in Gandhji vision of independent panchayat. May be person who had tech side knowledge should draw inspiration from Skype compared to Yahoo chat. Why yahoo chat failed and Skype become successful . reason of architecture of Skype made things to happen locally. Good , it is good to have digital but then for what? If it only billing, selling and service cost, then it is not good. If Digital helps farming community pump water, harvest , plant and manage field then it is ok. It appears that none of them talking about hard work ..seed to market , but they target only sales,, For this village people may not need Digital and they have been living happy 5000 + years. May be address, how digital going to take work load of farming community 1) water for irrigation 2) seed for farming 3) plantation .. 4) manage its growth 5) protect from pesticide 6) Harvest in time 7) Store in safe environment 8) transport to market place 9) get a proper price for item all these 9 items are critical for each and every family. Else that family can not have food. thus it is safe to think lot and innovate before just trying some Trader Mind set based things like buy and sell.. Move towards, Make and sell
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8 年Good thoughts. Change as you know, is the most permanent thing on the earth. A cash economy has dangerous portends of encouraging black money, fake currencies, terror funding and so on. Demonetization has highlighted the point that the immediate need of the hour is to shift to cashless transactions, regardless of the status of the individuals. We would not have cried like what we are doing now had we had a war, earthquake or similar Acts of God. Your analysis on the whole is a learning and launching pad both, to shift the rural economy faster to the stage of cashless society. Using this demonetization as an opportunity, all the stakeholders, from vendors to developers in the technological field must explore the big rural market considering its vast potential. Every nook and corner gives immense business opportunities for the watchful eye of the entrepreneurs.