Hemant Joshi
Deloitte Haskins & Sells LLP.

Demonetization – A Disruption for Growth

Demonetization is the current buzzword in the market. Though it is a new idea for most of the millennials, it has been tried and tested before in India and other countries with mixed reactions and outcomes. The first instance of demonetization was in 1946 to phase out notes with denominations of Rs 1000, 5000, and 10,000 from the market while in 1978 the High Denomination Bank Notes (Demonetisation) Act declared Rs 1000, 5000, and 10,000 notes illegal. Apart from India, several other countries such as Soviet Union, Britain, Myanmar, Nigeria, and Ghana have tried demonetization.

On November 8, the government announced the demonetization of Rs 500 and 1000 notes as legal tender in India starting November 9, 2016, which is the biggest move in the history of India. As a result, almost 86 percent of India’s currency was nullified. Demonetization is considered to be a brave step and is being lauded both by global and Indian leaders as a fight against black money. It is a major way to counter different issues affecting Indian economy such as a parallel economy due to unaccounted black money, counterfeit currency in the market, and terror financing. Though the move has disrupted the socio-economic ecosystem of the world’s second-largest emerging market, in the long run it is expected to boost the country’s GDP and substantially increase tax collection. The after-effects of demonetization witnessed huge deposits in the banks including Jan Dhan accounts, substantial rise in digital transactions, long queues for getting paper cash outside banks/ATMs, dip in retail activity, etc.

Cashless Economy

The dream project of the Indian government toward a digital transformation of services in the country has been massively successful in the banking and financial sector recently. The high mobile penetration with 100 crore subscribers, rising Internet subscriber base of around 35 crore, and availability of various digital banking and payment systems provide a great opportunity to improve financial inclusion. There is a steep rise (400–1000 percent) in digital transactions as a result of the demonetization move. Transactions on e-wallets have increased from 17 lakh per day to 63 lakh per day and value of transactions has increased from Rs 52 crore to Rs 191 crore in one month from November 8. Similarly, POS machines have generated high volume of transactions, which have increased from 15.2 lakh per day to 98.1 crore and in value terms it is up from Rs 112 crore to Rs 1751 crore. The feature phone-based USSD transactions (which is SMS based) saw growing adoption from 97 transactions in a day to 1263 per day and total amount transacted through them has increased from Rs 1 lakh to Rs 14 lakh per day.

JAM Trinity

Rural India is facing huge impact of demonetization because of high usage of cash and low availability of banking infrastructure. The JAM trinity helps to provide identity, financial inclusion, and last-mile connectivity to rural India with an aim to leapfrog from an informal financial system to a digital financial ecosystem. The Jan Dhan project which aims to bring rural population under financial ecosystem has around 26 crore accounts till date. Generally criticized for rising number of dormant accounts, the Jan Dhan accounts witnessed deposits of Rs 64,250 crore in the aftermath of demonetization. Around 93 percent of the rural India does not use any digital transaction and the demonetization period provides a golden opportunity for digital wallet players and m-banking and e-banking services to tap this market.

Digitizing the Banks

Digital wallets. The digital wallet service providers in India have registered tremendous growth due to demonetization and are spending a huge amount to expand their businesses. Transactions through e-wallets have increased by 271 percent post demonetization. Mobile wallet players provide basic services like mobile and DTH recharge, utility bill payments (electricity, gas, etc.), payments to kirana stores, peer-to-peer transfer of money, etc. Digital wallets have made urban life easier by ensuring their platforms are accessible in different segments such as transportation, small stores, and street vendors. The services are increasingly becoming user-friendly – especially the regional language interface helps rural subscribers. One-time-password (OTP), QR codes, and user password facilities are improving the security measures and provide anytime, anywhere banking options.

USSD. National Unified USSD Platform (NUUP) is a mobile banking service based on USSD. USSD is a technology providing banking services via a feature phone without the need for application and Internet connectivity. It allows checking account balance, generate mini statement, and fund transfer via MMID (a code allotted by banks on mobile banking registration), IFSC, or Aadhaar number. The telecom regulator has reduced the tariff for the usage of USSD-based mobile banking from Rs 1.5 to Rs 0.5 per transaction to accelerate adoption of this platform.

UPI (Unified Payment Interface). Launched in August 2016 by National Payments Corporation of India (NPCI), the UPI service saw sudden popularity post demonetization. Transaction through UPI rose by 119 percent post demonetization. UPI is an online payment solution which facilitates transfer of funds instantly peer-to-peer using a smartphone. It is being used by 19 banks to provide financial services through mobile devices.

Payments Banks. Payments banks are opening outlets in the rural areas where users can open accounts by providing Aadhaar details as KYC. Payments banks provide mobile ATMs, point-of-sale (POS) machines and wallet services to help people with easy transaction services. They also offer attractive interest rates and loans.

Mobile money. Mobile money is a huge success in underdeveloped nations such as Africa and Kenya. Almost 75 percent Kenyans use m-pesa platform for financial transactions, where the formal banking sector is not developed. High mobile penetration and poor banking infrastructure can help Indian telecom operators to grab the opportunity in the market.

Aadhaar-enabled Payment Systems (AEPS). The government initiative to strengthen Aadhaar-enabled transactions is expected to simplify the digital payment process as these are card-less and pin-less. The mobile users would be able to digitally transact money by using the Aadhaar number and biometric authentication without having to pay the usual merchant charges.

Promotional Events

The government has announced Lucky Grahak Yojna to promote digital payments through RuRay cards, UPI, AEPS, and USSD. The Lucky Grahak Yojna will provide a prize of Rs 1000 each to 15,000 eligible winners for 100 days starting December 25. In another weekly award program, 7000 consumers will be eligible for Rs 1 lakh each. Under the Digi-Dhan Vyaapari Yojna, every week, more than 7000 merchants will be eligible for Rs 50,000 prize. The total cost of the program is expected to be Rs 340 crore which signifies the government’s intention to bring digital technologies in the Indian banking sector.

Bottom Line

Demonetization provides a huge opportunity to move India toward a cashless economy. The current mobile wallet market of Rs 154 crore is expected to reach Rs 30,000 crore by 2022. The key lies in ubiquitous wallets for transactions and fund transfers and covering all types of users – those having smartphones, those having feature phones, and those not having phones (through innovative platforms and approaches). The rising adoption of digital technology will help meet the challenges of addressing black money, terrorist funding, financial inclusion, improving tax collections, reducing leakages and frauds, and reducing the huge cost of designing, printing, transporting, and distributing paper money, which is about Rs 21,000 crore per annum.

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