The past couple of years have seen a number of initiatives to facilitate cashless transactions in the Indian economy, including the launch of the Unified Payment Interface (UPI) earlier this year. Such moves may raise the volume of cashless transactions in India in the years to come but the latest available internationally comparable data shows why moving towards a cashless economy remains a Herculean challenge for the country.
Data pertaining to payment, clearing and settlement systems in 23 major economies, recently released by the Bank for International Settlements (BIS) shows that India lags far behind both emerging market and developed peers in the move towards a cashless economy. Non-cash payments transactions in India amounted to only 11 per inhabitant in 2015, much lower than other BRIC economies, with China reporting 17 such transactions per inhabitant in 2014 (data for China is unavailable for 2015).
It is not surprising then that India’s cash to GDP ratio of 11% is among the highest in the world. The BIS report showed that the only economies with a higher ratio of cash to GDP were Japan, Hong Kong and Switzerland, all of which have interest rates near zero. The fact that countries with near-zero interest rates will deal more in cash is reasonable given that low interest rates reduce the cost of holding cash. But India’s official repo rate was 6.75% in March 2016, when India’s cash to GDP ratio was 11%, almost equal to that of Eurozone, which has interest rates close to zero.
The level of non-cash transactions has risen even in India over the past few years. Debit cards seem to be the instrument of choice for Indians in making non-cash payments.
According to BIS, debit cards accounted for around 70% of the volume of non-cash transactions in India. However, in terms of value, the leader in non-cash payments transactions has been credit transfers between accounts, accounting for 89% of the value of all reported non-cash transactions in India.
While debit cards have been the main instrument aiding India’s move away from cash, an international comparison shows that we still have a long way to go in terms of the penetration of debit cards.
In India, one in two people have a debit card, which also typically functions as an automated teller machine (ATM) card. While the number of cards per person in India is low by global standards, in terms of the number of withdrawals per card, India stands in the middle rung among the major economies of the globe. Withdrawals per card in India are the highest among emerging market economies for which data are available, ignoring the outlier Saudi Arabia. More importantly, the economies which show higher withdrawals per card than India are mostly those countries where interest rates are near zero or sometimes even sub-zero. In fact, Saudi Arabia, which shows the highest number of withdrawals per card, also has a relatively low policy interest rate of 2%. Thus, Indian cardholders have a high propensity to withdraw cash despite relatively higher interest rates, which is most likely a reflection of the high cash usage in the Indian economy.
The high withdrawal rate seems to suggest that ATM cards may impede rather than facilitate a move towards a cashless economy. But that view may be mistaken. Research suggests that a reliable and widespread network of ATMs could reduce the transaction demand for cash.
There are around 165 ATMs per million people in India, the lowest in the BIS sample of major economies and much behind other BRICS economies. Of course, the density of ATMs per geographical area is relatively high in India, when compared to other emerging market (EM) economies. With 62 ATMs per thousand square kilometres, India’s density is second only to China’s 92 ATMs per thousand kilometres among the major EMs. However, India’s ATM network also has to cater to a relatively high population density.
India also lags major economies in terms of the availability of Point of Sale (PoS) terminals which process cashless payments.
With a large section of population still lacking access to formal banking services, one way to transition towards a cashless economy would be to increase the use of mobile-based prepaid instruments (PPI) or e-money products, in which India has shown signs of progress. According to the BIS, India clocked the fastest growth, both in terms of number and the value of e-money transactions in 2015, among the twenty-three major economies studied by BIS. However, India’s growth is from a low base and the value of e-money transactions as yet amounts to only a minuscule 0.05% of all non-cash retail transactions, while accounting for 5.5% of the volume.
Data from the World Bank’s Global Financial Inclusion (Global Findex) survey shows that India lags many of the EM peers in terms of mobile money penetration.
India can learn from other countries in the developing world, which have managed to reduce their dependence on cash even while bringing more people in the folds of the formal banking network. Kenya has been a well-documented success story, where mobile money has spread much faster and deeper than in India. Kenyan households with access to mobile money were able to manage negative economic shocks (like job loss, death of livestock or problems with harvests) better than those without access to mobile money, according to World Bank research.
While the recent initiatives of the central bank and the government to make cashless transactions easier are laudable, India has a long road to travel in her journey towards a cashless future.