Case Analysis: Money Matters

On that historic night of 8 November 2016, I was travelling to Chennai by road expecting to be home for dinner, when I began to see messages and calls pour in. As some clarity settled in, the only instruction I gave was for the entire senior management to be ready for a video conference, connecting our Chennai office and our corporate office.

In the next one hour, I began gathering my thoughts on what needs to be done over the next 36 hours. When I reached my office by 9.45 p.m., Chotu from the nearby restaurant was ready with about 30 food parcels. Our office receptionist handed over four Rs 1,000 notes to him. Chotu replied, “Rs 1,000 note selladhu sir, card kodunga sir!” (Rs 1,000 note won’t work. Sir, please give card!”) and pulled out his PoS (Point of Sales) machine!
My immediate feeling was that, “This country can take anything!” But I also remember thinking this: Chotu has caught up with the news and it was business as usual at Chotu’s food shop.

The case study beautifully covers the problems of various sections of the society and being a banker, I particularly could connect well with Nachiket who runs an ATM network.

But can this country really take anything? We see Nachiket and the banking fraternity was put to the biggest test. After the arrival of the ATMs, bankers had forgotten the old days when they had to deal with scores of customers waiting in a line. Now they were back to one-on-one interaction with the customer. Only this time they were irate customers, who waited for hours to exchange and deposit notes. The crucial time had begun: bankers would have to now account for every note of Rs 1,000 and Rs 500. They stayed till midnight at office for the next seven days to keep books in order, managing exchange, receipts and payments “manually”, which the senior staff have almost forgotten while the “juniors” watched, disbelieveing that this was the way it once was.

Undoubtedly these were not normal times for anyone. The average citizen was anxious to safeguard his savings while mainstream media supported by social networks ensured that the average citizens are always kept at “high adrenaline” mode. Since citizens believed that a majority of the media was biased and the expressed opinions were dependent on the political opinion about the Prime Minister, they maintained cool in the face of hardships. Despite the fact that the entire opposition was united against the Government on this sudden demonetisation, the political parties failed to grasp the mood of the common man.

The ground reality is that the daily wage earners and road side shop owners are the worst affected in urban areas, and the hardships faced by rural poor is difficult to fathom. Yet the common man accepted these difficulties expecting economic miracles in the ‘’ future. Though the nearest bank branch is a 45-minute bicycle ride away, the nearby white label ATM’s helped the rural folks access cash without the erstwhile difficulties. Now, the empty ATM’s derailed their daily life increasing anxiety.

Let us take a look at a few numbers and official statistics pertaining to India:
-Population :1.21 billion (2011 census)
-Mobile connections: 1.028 billion (August 2016)
-Aadhar cards issued: 1.08 billion (26 November)
-Families: 24 crore (2011 census)
-Jan Dhan accounts: 25.68 crore (23 November)
-Jan Dhan accounts with Rupay cards:19.52 crore
-Debit cards in usage: 2.64 crore as on August 2016
-Villages in India: 6,40,867 (2011 census)
-Villages with Rural and Semi urban Branches: 86,425 (31 March)
-Business correspondents providing banking services across the country: 4 lakh (31 March).

The data suggest that, by and large, a significant majority of the families including poor have mobile connections, Jan Dhan accounts and RuPay cards.
Hence while the infrastructure required for making India “cashless” is available, are these enough? For instance how many RuPay card holders actively use their ATM’s? As recently as three months ago the government expressed concern that a significant portion of Jan Dhan accounts remained with a “zero” balance. The cashless dream depends on these cards being used too.

Though the government have put in efforts by opening Jan Dhan accounts right from 15 August 2014, the day the PM announced it, a large number of them remained zero balance as people found it difficult to change old habits. To a great extent, distribution of NREGS payments or gas subsidy through bank accounts have forced many to operate Jan Dhan accounts. But bringing about a comfort level is a long haul, but not difficult if enabling facilities are created. For all learning has a starting point.

This faith comes from the fact that, ours is a country where you will see examples for all extreme possibilities. On one hand you hear the netas fighting that demonetisation will affect rural poor. On the other, there are companies like the Chennai-based Hatsun Agro saying they have been making all farmer payments through banking channel for many years. One also hears of stories where roadside eateries and small restaurants are donating the unsold food to orphanages as there were comparatively less people coming out to eat due to paucity of cash. Or stories where a local grocery shop owner is giving supplies on credit by signing on a piece of paper (like the RBI Governor!).

On one hand, you see huge crowd waiting patiently outside ATMs/bank branches to draw cash. On the other, you hear news of a handful of bankers/branch managers and other responsible officials, being arrested on money laundering charges.

The government has, in no uncertain terms, announced that our economy has to become at least “less cash” economy if not “cashless”. The media tell us how the government is pushing for the installation of PoS machines and how e-Wallets by both banks and stand-alone companies are gaining prominence. One company came out with the idea of using mobile apps to substitute PoS machines, but had to shelve the idea as security concerns were raised. But the thinking has begun!

The legislators argue that all these initiatives will cause hardships to the rural poor engaged in agriculture. The Assam CM declared that a lot of initiatives are being implemented to get tea garden workers into the banking ambit. The labour ministry has asked companies to transfer salaries to the employees’ bank accounts. It is claimed that these practices will improve compliance on various sections of labour act including minimum wages act.

The point that rural India will find it difficult to get into electronic economy is countered with the argument that operating banking applications on mobile phones is going to be as easy as operating “WhatsApp”. Hence push towards ‘less cash’ economy does seem possible.

Nachiket’s efforts won’t go to waste. People may or may not accept that demonetisation may help in reduction of counterfeits or black money. But despite all odds, the common man seems to believe that demonetization is going to change our economy, though several political parties are opposing the move.
With all these information on hand, it looks like the country is moving towards “less-cash” economy. The currency under circulation may be brought down from 12+ per cent of GDP to 8 per cent of GDP following global standards.

It means at least 1/3 of the currency in circulation will be substituted by electronic banking channel.

It is important for Nachiket to reevaluate the strategy of his line of business as the cash withdrawal pattern will change. It means number of bank owned ATMs in the market has to come down. This rationalisation of ATM network may result in all offsite ATMs being taken over by white label ATM network. It could be a huge opportunity for Sahas. Alternatively white label ATM networks also may find it difficult to operate the business in profitable manner, as the demand reduces.
The digitisation of rural areas will also happen after the initial hiccups are solved. People like Abay’s father-in-law Keshav will be getting access to cheaper funds and importance of money lenders will decrease. The Jan Dhan account holders perhaps may not receive Rs 50,000 per account as it is rumored across villages, but the long term benefit will be much higher.

To sum up, sure, demonetisation of Rs 1000/Rs 500 is going to take the country on a growth trajectory. However, there will be temporary problems for the common man to endure. It is not yet clear whether the restriction on cash withdrawals will stay or not. If the restrictions are not continued, we will get back to old days and currency usage may not decrease. It will raise the questions on the demonitisation move (strictly speaking, it is not demonitisation. It is withdrawal of legal tender!).

If restrictions continue, digital payment systems will take the lead reducing the utility of ATMs. Only time will tell if white label ATMs will survive. Alternatively banks may decide to spin off offsite ATMs, which could be taken over by white label ATM companies opening a new path.