The Dream of a Cashless Economy

This article is the third section of a larger series that weighs up the reasons given for the demonetisation of 86% of Indian currency, and also seeks to uncover the true compulsions behind the monumental action.

The entire study can be viewed as one article. Link below.

Source: India Today magazine, RBI data, Business Standard. Note: RBI has not given out data on ‘cash recovered’ since Dec. 10th ’16.

Throughout this article, we’ll be dealing with all kinds of large number in lakhs, crores, million & trillions & everything in between. To help with quick conversion, here’s a ready reckoner for reference.

In his initial speech on 8th November, our current PM Narendra Modi mentioned ‘black money’ 18 times without a single mention of a ‘cashless economy’. However, in two speeches that he gave on 27th November, he mentioned “cashless” and/or “digital” 24 times, whereas ‘black money’ came in only 9 times. Some Cake for thought.

To be able to make cashless payments, the first requirement is a banking account of some sort. Then comes the internet & mobile phone bit, which we’ll come to later.

In India, banking is still a luxury for the vast majority hovering around the poverty line. So let’s start by trying to understand why exactly so many are still unbanked.

Rural areas in India, where 840 million Indians or 68% of the population live, are still hopelessly poor. And mostly illiterate. Thereby failing in the two vital qualifiers required for banking. How bad is it? Well, a third are completely illiterate and barely have two square meals a day, and going by various surveys, at least two-thirds of rural households still do not have toilets. Yes, of course this is all the Congress’ fault, what isn’t!

Source: LiveMint, Dec 09, 2015.

As the rows 4 & 14 above tell us, almost half our population live their entire lives in debt. They earn their living on a daily or weekly basis, and almost immediately spend it on subsistence needs — food, shelter, clothing, and depending on the gender of their offspring, education or marriage. Forget saving, their primary need is to borrow money. And banks, as we well know, do not lend to those without collateral. Hence, the inescapable need for the usurious money-lender.

The majority of rural dwellers still live too far from bank branches & ATMs. Effective use of bank accounts is not a viable proposition for them. It is pointless to place money in a bank if the system does not provide you with the infrastructure to withdraw it at will and with ease.

Official data shows that only 27 percent of villages in India have a bank within a 5 km radius. And in rural India, travelling 5 km up and down is neither affordable, nor quick. Roads are bad, buses are scarce, and pedaling it on cycles or cycle-vans can take up half a day.

For the urban poor also, banks are rarely an attractive or feasible solution. They work from 6 am till 6pm, or even later. Most banks are open only from ~10 am till ~4 pm. Besides, public-sector bank clerks are discouragingly rude to them, and being illiterate they are reliant on strangers for each transaction.

Business Standard takes a look at some of these factors to give an idea of the state of India’s financial inclusion and how the country fares globally.

What about the PM Jan Dhan Yojana and all that? Didn’t the govt. just conduct a massive drive & enter the Guinness book of world records?

Yes they did, and the numbers are impressive — as on November 9th, there were a whopping 25.78 crore (257.8 million) bank accounts, with an accumulated balance of Rs 45,636.61 crore. This works out to around Rs. 1,800 per account.

However, half of these accounts have been found to be either ‘zero-balance’ accounts or those where bank officials, under pressure from above, have been putting tiny amounts of money (1–10 rupees) to mask their dormancy.

Source:, 13th Sep. 2016

Indeed, as per RTI information provided, the number of zero-balance accounts have fallen sharply — from 76% in September 2014 to almost 46% in August 2015, then a steady fall to 24.35% on August 31, 2016 — primarily because of this one-rupee-trick.

Source: Firstpost, Apr 8th 2016.

So, why did they open these accounts if they didn’t plan to use them?

Most of these accounts were opened in bulk during the PMJDY drives in 2014–15, by coaxing the masses with various promises and incentives such as a RuPay Debit card for every account holder, an inbuilt accident insurance cover of Rs 1 lakh and life insurance cover of Rs 30,000. Besides, the scheme also envisaged channelling all government benefits to the beneficiaries’ accounts. The scope of the scheme was later expanded to offer other products too.

“Our preliminary estimation shows that around 25% of accounts are repeat or multiple accounts opened by people already holding accounts in different banks,” GS Sandhu, Secretary (Financial Services) Ministry of Finance, September, 2014 —, Sep 13th, 2016.

Every zero-balance account cost a bank an average Rs 140 a year to maintain.

The ground reality is that a small percentage of these accounts are effectively being used. On the other hand, bank officials are regularly hounded by PMJDY customers who impatiently want to know when ‘their money’ — the imagined or promised incentives and subsidies — is going to be put in their Jan Dhan account.

Besides all of these problems, there are still just too few bank branches & ATMs in rural India — approx. 5 ATMs per 1 Lakh people. 850 million people reside in 640,000 villages in India, that works out to…

1 ATM per 16 villages

1 bank branch per 12 villages

…and then we wonder why they don’t use banks more.

What about Banking correspondents — aren’t they our new saviours?

Under the PMJDY there are 32,481 branches and 126,592 agents or bank mitras/correspondents. This brings this figure of unbanked rural villages down to, the still huge, 425,000 number. The success of micro-finance institutions (MFIs), such as Bandhan Bank, in reaching rural areas is great news. But as of now, they’re still mere drops in the ocean. Furthermore, starved of HDN, these MFIs have had to suspend much of their operations and many might not survive the demonetisation downturn.

The sad truth is that our rural areas are nowhere close to being adequately banked. There is at present 1 ATM for every 20,000 people, and maybe 1 branch for every 16,000 people.

They barely even have basic necessities such as education, roads, electricity, healthcare or even running water — it’s just downright tomfoolery to be talking about wireless connectivity & smartphones!

Okay, how about our thriving cities? That’s where the real cashless economy is, isn’t it?

As of 30th June 2016, there were 174,694 ATMs in Urban & Semi-Urban centres. This works out to approximately 42 ATMs per 100,000 urban dwellers. Not too bad you’d think. But then, an RBI survey in early 2016 found that a third of ATMs in India don’t work.

Just for perspective, overall figures for the BRICS countries are — Brazil 114, Russia 173, India 18, China 76 and South Africa a density of 69 ATMs per 100,000 adults.

Source:, September 23, 2016

That’s where the cashless party ends. According to a RBI report released in March, Concept Paper on Card Acceptance Infrastructure, India’s average number of card transactions per inhabitant — at 7.8 or thereabouts — is among the lowest in the world.

In fact, mind-numbing as it may seem, in FY16, there were a fewer number of POS Debit Card transactions than there are people in India. Although, surprisingly, at 661.8 million there was 1 debit card for every two Indians.

Source:, Dec 06, 2016.

There are only 24.5 million credit cards in India — 1/30 the number of debit cards, but their usage racks up to almost 2/3 the number of transactions.

Now, think for a minute, how many debit card transactions do you make in a year? 100, 500, 1000, more? Which implies, it’s just 20–30 million people who effectively comprise the entire user-base of debit & credit cards.

Source: Livemint, 20th Apr 2016.

Currently, over 80% of transactions using bank cards (debit and credit) are, paradoxically, for withdrawing Cash — as this table above shows.

Perhaps the reason for this poor show is that, once again, India has one of the lowest per capita Point of Sale (POS) card-swiping machines. Current data indicates India has some 1.46 Million such machines (most large merchants have 2 or more) which works out to approximately 90-odd terminals per 100,000 people. Even among emerging economies this is very low, compare this with China 450, and Brazil 3,300 terminals per 100,000 people.

So, why are there such few POS card-swiping terminals?

At the end of the day, it’s the cost factor that acts as a deterrent. Indians are notoriously tight-fisted — with good reason I might add — especially those running small businesses. Setting up a card swiping terminal costs a trader between Rs 4,000 and Rs 8,000 today. Then there are the service charges; termed as the rather harmless-sounding MDR, or Merchant Discount Rate.

The average MDR across the world is between 1–3% . For online merchants, the rate tends to be higher. In India, on every card transaction, merchants pay a fee of around 0.25–1% for debit cards and around 1–2% for credit cards. Below are the official rates as per RBI notification.

0.25 per cent for transactions up to Rs 1,000 and 0.5 per cent between Rs 1,000–2,000, the RBI said in a notification. The existing MDR cap is 0.75 per cent for transactions up to Rs 2,000 and 1 per cent for over Rs 2,000. However, there is no RBI cap on MDR on credit card payments.

Mostly, merchants absorb this charge, but sometimes they pass it onto the consumer. This in turn puts off the consumer, and they end up doing the deal with good old cash instead.

But note, all the above is only possible provided the merchant has access to electricity, a working phone line and a reliable internet connection. All of these being relative luxuries anywhere outside metropolitan India.

PayTM! We’ve forgotten about them and all these new e-wallets.

If anybody struck gold with this demonetisation business, it’s PayTM — who till then were running massive losses — Rs. 1,534 Cr. for FY16 — almost 3 times their revenue. Just hours after the Nov. 8th announcement, an utterly ecstatic Vijay Shekhar Sharma appeared on various interviews looking like he was about to break into a gleeful song and dance at any point.

And then the next day, he went on to publish full cover-page ads in numerous newspapers — the likes which will live on in its jingoist infamy.

E-wallets are definitely a great accessory for the financial system to have, but not the panacea that is needed.

Consider these numbers:

India has 930 million active mobile subscribers (not unique — for e.g. in our family of 4, we have 7 connections), according to this November 2016 TRAI report. Of these, 154 million — a mere 16% have broadband connections (3G or 4G).

This data back is backed up by a 2016 survey by Pew Research, which found that 17% — 131 million adult Indians use a smartphone. 7% in low-income families 22% for wealthier ones.

And even amongst those ~130 million consumers, the average page-load time on mobile is 5.5 seconds; compared to 2.6 seconds in China, 4.8 in Brazil, 4.5 in Sri Lanka, 4.9 in Bangladesh and 5.8 in Pakistan.

India is a 96th in terms of download speed and 105th in terms of average bandwidth availability. Oracle Maxymiser, a website optimisation tool, reports a two-second threshold before users stop an online transaction.

Would you wait 6 seconds for a page to load and then go about entering a number or scanning a code, and then wait for confirmation — when within that span of time, you could fish out your wallet, pay the 10 rupees and already have a few sips of your kadak chai.

E-wallets are perfect for transactions such as paying for — cab rides, cigarettes you bummed at work, quicker online checkouts, splitting last night’s bill, returning loans to friends, and of course, receiving cashbacks — not so much for everyday transactions where speed and efficiency is of the essence; those quick buys when you’re in a hurry and so are those waiting in line behind you.

Asking India, that is Bharat, to turn Cashless overnight is like putting a few Red Bull stickers on a souped-up Tata Nano and expecting it to race at the Formula One. It’s going to turn into a joke.

What about cyber-security? Rahul Gandhi’s twitter account got hacked recently, didn’t it?

Yeah, now here’s a figure where we rank fairly high. When it comes to cybercrime, India is 6th in the world. The incidence of cybercrime in the country has doubled in just a year. Users and experts alike are worried about growing cybercrime, with almost zero conviction. The IT Act is just an overarching law with few provisions for specifics and almost none for cyber attacks.

Source: Times of India, Oct 20, 2016

In Oct. 2016, in the biggest-ever security breach affecting the Indian banking sector, 3.2 Million (32 lakh) debit cards of various public and private sector banks were ‘compromised’ by cyber malware attacks in some ATM systems. Each data breach costs the bank Rs. 3–4,000.

Overall, India also has a record of poor internet security, which is progressively becoming worse — it tops the world in terms of ‘ransomware’ attacks. Ransomware is a type of malware that usurps control of systems preventing users from access — targets include banks & establishments with sensitive, confidential information.

When your wallet is stolen or lost, you stand to lose only the limited amount of cash that was there — cards can’t be used without PINs or OTPs. However, when servers that store our security details are hacked, the entire content of our bank or credit accounts can be emptied in a jiffy, and furthermore we don’t even know about it till much later.

And then there’s the recent business of Aadhar details being shared with Reliance & other such corporations who want to use it. India is unique in the near-absence of legal protection — There’s no specific privacy law in India and nothing to protect data breach.

What about the ‘Cost of Cash’? I’ve heard its ridiculously large.

Over the past few years, studies conducted by think-tanks — bankrolled by a plethora of entities with more than a few vested interests — have shown how the ‘cost of cash’ to the Indian government, is enormous.

But if we dissect these large numbers, it is apparent that these costs in fact translate into lakhs of jobs. To create, transport & disperse cash, the government creates gainful employment for lakhs of drivers, security guards, factory workers, bank tellers, what have you — all of these are important white & blue-collar jobs which help in sustaining the formal economy.

On the other hand, charges borne while using ‘cashless’ mechanisms are directly transferred out of the country and into the hands of multinational corporations such as VISA, Mastercard and Citibank — to name a few. There’s an insightful article about it which delves into the intricacies of going Cashless in India.

The bigger question here is… is it right (or even financially prudent) for the government to transfer the costs of transactions to small merchants & consumers — which is, what moving from cash to cashless comes down to.
Source: LiveMint, March 16th 2016

It costs the government ~3 Rupees to print a 1,000 rupee note — 0.3 percent. Every thousand rupee note changes hands hundreds of times in its 3–5 year lifespan. Hence the ‘cost of cash’, comes down to an infinitesimal fraction of a percent.

However, with cashless systems, we are paying 0.25 to 2% (+bank fees & service taxes) for every transaction. That works out to 5–20 rupees as processing charges on each and every transaction (range of Rs. 500–2000).

At the risk of sounding paranoid, I feel I am compelled to say — It’s all a scam!

Next Section:

The Dream of a Cashless Economy

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