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Is cash still the king in India?

June 5, 2020


Demonetization is the first nail in the coffin for cash in India.

UPI 1.0 is the second nail in the coffin for cash in India, making transactions much more accessible with everyone’s mobile becoming their wallet. Besides, merchants grabbed UPI with both hands as it is immediate credit to their accounts, and now there is no MDR that they have to pay.

COVID-19 pandemic should have been the third nail in the coffin in cash, due to health reasons, as people want to look at contactless transactions.

However, it didn’t turn out to be so.

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Experts jumped the gun and predicted that there would be a massive surge in digital transactions due to health reasons, and merchants wouldn’t want to handle cash for fear of getting infected by the virus. All of those predictions didn’t come true.

Cash demand during the lockdown is almost double of what was witnessed during the election period last year.

Cash infused by RBI or the currency in circulation amounted to Rs. 1.42 lac crore between April 01 and May 15, the latest release on reserve money indicated. The money in circulation is almost double the amount of Rs. 72,984 crore released in the same period a year ago, during which election cash demand was high.

Cash was used to buy essentials from local Kirana stores as e-commerce, and large retail outlets facilitating digital transactions had virtually stopped.

A lot of cash is not coming back to the banking system during the current lockdown phase. Most money credited as part of Direct Benefits Transfer (DBT) into accounts of women and senior Jan Dhan accounts were withdrawn during this lockdown. The withdrawals are estimated to be anywhere between Rs. 40000, and 50000 crores.

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While this surge in demand for cash might get back to normalcy, as money comes back into banks, however, when there is a crisis, people would go back to cash.

Many Kirana stores could not accept digital payments as they ran out of paper rolls on their POS machines. Can you believe it? They weren’t getting enough support to refill those paper rolls, and so they reverted to cash. On top of it, onboarding of additional merchants on the acceptance infrastructure also stopped.

The world’s largest economies still keep cash in circulation between 8% and 15% of their GDP. In India, the cash in circulation was 11.2% of the GDP in 2019. You can survive just with your plastic and your mobile phone in countries like Denmark, Norway, Sweden, and Finland, but they are not the world’s large economies.

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Also, about 2 billion people are not covered by banking in the world, and about 190 million people in India do not have access to bank accounts. They cannot be left behind in our digital push. It would affect the vulnerable sections of the society – the unbanked, the elderly, the ones with mental health issues, the homeless, and uneducated, among others. Such exclusion will harm and hinder society.

Banks are not too enthused about financial inclusion, as it means mass banking and their stakeholder interests lie in class banking. So, they do it more as a necessity, and servicing those financial inclusion accounts cost a lot of money for the banks.

So, cash would continue to remain the king in India for many more years now. However, there is a perceptible shift towards digital payments, more so because of the UPI push, than due to acceptance infrastructure like POS systems.

People trust cash. It’s free to use and readily available for consumers, it’s confidential, it cannot be hacked, and it doesn’t run out of battery power – these unique qualities continue to hold significant value to people living on all continents – Jesus Rosano, Chief Executive of G4S’ Global Cash Division, World Cash Report.

In our digital push, the key will be to ensure that it does not leave anyone without access in the future as this digital change accelerates. Cash will be key for the unbanked and the underprivileged. Less choice also means fewer solutions during a crisis.

Sabapathy Narayanan

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