JOIN USProponents argue that the disruptive impact of demonetisation will spur the move towards cashless society since electronic payments are cheaper, convenient and now necessary. It is argued that this shift will benefit the rural economy.
The aim to expand the scope of cashless transactions, though laudable, is to put it mildly a Herculean task, especially in rural India. Contrary to perception, supply side issues and higher cost of electronic transactions to the rural consumer rather than mindset issues hinder greater adoption of cashless transactions.
Even before the disruptive impact of demonetisation, the rural economy was in the midst of rapid changes due to impact of education on labour market, mechanisation of agriculture, improvement in transportation, impact of technology and spread of banking – many of which have helped speed up the economic cycle. The present need to move towards cashless payments comes at a particularly inopportune time for rural India.
First, the expansion of banking network through the Business Correspondent (BC) model started gaining traction only in the last 3-4 years. Unfortunately, its spread has been uneven and woefully slow. In the villages where the BC model works effectively it has made a difference to the rural economy by expanding the scope of the formal sector, especially offering greater convenience related to money transfers, remittances and government-to-citizen transfers.
An analysis of RBI statistics indicates that the BC model works effectively in about 10-15% of the villages where they are present. The effectiveness of this model is severely handicapped by issues related to connectivity and daily transaction limits imposed by most banks on accounts opened through the BCs, thereby requiring multiple trips to the BC outlet or bank branch to complete a transaction. Often government-to-citizen payouts like drought or flood relief, insurance refunds, etc, are all casualties. Peculiarly, demonetisation, instead of encouraging the BC model, has severely impacted it with new restrictions on size of transactions, freezing money transfers and use of Immediate Payment Service (IMPS).
Second, more problematically, the infrastructure necessary to take up digital transactions are either non-existent or when present, problems and cumbersome processes related to digital access, education levels and dispute resolution drastically reduce their effectiveness. India has few merchant outlets equipped with Point of Sale (PoS) machines. RBI statistics indicate that there are about 1.4 million PoS machines installed in the country. In most districts, only between 5-10% of the business establishments have a PoS machine with all of them concentrated only in the large urban areas. It is not possible to use a debit card because there are no merchant terminals or because people have not been issued debit cards. Approximately one-fourth of the Jan Dhan accounts holders (6.16 crore of the 25.68 crore) have not been issued RuPay cards.
Third, the charges incurred while using a debit card in a merchant terminal is a powerful disincentive. Cumulatively, transacting in cash is least expensive for citizens in rural areas though using cash may be expensive from a government perspective.
Mobile banking
In the above circumstances, mobile banking is actively considered one possibility to expand access to the banking sector. Its attraction increases since there are an estimated 15.4 crore mobile Internet users. Though possible, it is imperative to note that despite technology’s role as an enabler, in poor countries like India it can lead to exclusion of large segments. India’s literacy ratio of 74%, combined with low penetration of smartphones, estimated at 20%, means that the path to mobile banking may not be as easy as suggested.
Our study on mobile Internet and mobile banking indicates that users are below the age of 40-45 years, thereby excluding large segments of population which already suffers from lack of financial literacy. Invariably, there are parts of the rural economy where electronic transactions currently exist: Direct Benefits Transfers (DBT) and remittances or supply chain payouts by formal sector participants. Despite these, it is extremely difficult to transact in cashless mode. Little wonder that cash transactions are central to rural economy and is unlikely to change dramatically in the near future.
Demonetisation will alter the nature and functioning of the informal sector which is central to the rural economy. The immediate impact of demonetisation is that it has brought the rural informal economy to a standstill. Important rural economic activities like pawnbroking, moneylending and chit funds are the immediate casualties. Raising cash credit is impossible and purchase of essentials and farm inputs on credit has exploded due to cash shortages. Indications are that the shortage of cash is laying the ground for reinvention of the informal economy once the cash shortage eases.
As on date, there are few indications that demonetisation is about to lead to a fundamental shift in the way rural economy functions. This is because the line separating the formal and informal sectors is quite porous and has never been strictly segregated. Growth of the formal sector has invariably been accompanied by the growth of the informal sector. Consumers of formal financial services may concurrently be providers or consumers of various informal services like borrowers from banks and gold loan companies lending in the informal markets to take advantage of interest rate arbitrage opportunities.
Demonetisation does not automatically guarantee that people in rural areas are or will embrace the formal sector en masse. Though the formal sector, especially the banking sector is likely to benefit, the scale of benefit once currency availability reaches normal levels are not yet known. Unless there are immediate measures to incentivise the use of cashless payments and the creation of an enabling ecosystem for the use of electronic payments, the fundamental nature of the rural economy is unlikely to change in a hurry.
(The writer is an independent researcher based in Andhra Pradesh and is associated with Institute for Development and Research in Banking Technology, Hyderabad)