RBI-led Decisions Help India Make Considerable Progress in Achieving Universal Financial Access, Reveals ‘Cost of Cash in India’ Report

  • Report suggests encouraging electronic payments would be the ‘natural starting point’ to achieving complete financial inclusion
  • Despite progress made, India continues to be a cash-intensive economy; less than 10% of Indians aged 15+ have ever used any kind of non-cash payment instrument 

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Mumbai, India, 16 January 2015The Reserve Bank of India (RBI), has taken a number of decisions that greatly reduce the barriers to financial access, especially on the supply side, according to the findings of the inaugural ‘Cost of Cash in India’ report. The report is the second in a series of country reports on the ‘Cost of Cash’ by The Fletcher School’s Institute for Business in the Global Context (IBGC), with the support of MasterCard.

The report notes that these decisions include a welcome set of innovations (universal ID cards, protocols, servers, and related-KYC regulations) which have served to lower the financial institutions’ cost of enrolling new customers. Standardizing the design of financial products may ultimately squeeze margins but it would drastically lower the cost of new customer acquisition. RBI’s role in aiding wider financial reach also includes currency distribution, ATM services, currency chest operations and payment systems.

The report makes a strong pitch for the role of electronic payments in achieving universal financial inclusion. It says, ‘As a matter of strategy, payments are the natural starting point for financial services. They function as a sort of virtuous gateway drug into financial services, by changing perceptions about the advantages of electronic money. Even people that have no funds to leave on deposit and whom the bank considers poor credit risks, can take advantage of payment services with meaningful benefit.’

Commenting on the report, Vikas Varma, Area Head, South Asia, MasterCard, said, “The steps taken by RBI over the years should be lauded as they strive to make the idea of financial inclusion a reality. The report highlights the benefits of electronic payments which we believe are central to India’s future success in achieving universal financial access. Innovations in the electronic payments space not only deliver greater transparency but more importantly, they simplify transactions, enhance security, increase efficiency and have the potential to dramatically reduce costs.”

Even as the report emphatically states that the payments industry in India is on the cusp of a revolution, it is cautious in noting that winning individual payment market segments is not a foregone conclusion. Though the percentage cash transactions have continually declined over the years, it remains at a significantly high level on a standalone basis.It is thus safe to conclude that despite the progress made, India has a long way to go in achieving universal financial access as it continues to remain a cash-intensive economy.

CASH AND NON-CASH TRANSACTION PROFILE FOR INDIA

Cash and Non-Cash transactions India

Source: EuroMonitor Passport 2012

  • Fewer than 35% of Indians above the age of 15 have used a bank account and less than 10% have ever used any kind of non-cash payment instrument. In fact, the percentage of India’s population that has accounts with formal financial institutions (35%) is significantly lower than that of Kenya (42%), Brazil (55%), and China (63%)
  • Mobile banking remains a banking product and not a robust retail payments system, with less than 3% of the value transacted by cards in the year ended March 2014.
  • The total value of ATM transactions increased more than five times between 2007 and 2012, from about 3 trillion to about 18 trillion rupees, while the value of card transactions barely doubled in the same period from 1 to 2 trillion rupees. However, when weighted for population, India fares poorly in terms of ATM access when compared to even lesser-developed markets such as Kenya, Nigeria, or Egypt.
  • India’s cash intensity also stands out in contrast to other developing countries. The value of notes and coins in circulation as a percentage of GDP in India is 12.04%, compared to 3.93% in Brazil, 5.32% in Mexico, and 3.72% in South Africa.

The report also includes insight into how households pay differently for access to cash – according to their place in society, determined by income, employment, age, and place of residence; and their widely differing views on the risks of cash and strategies for risk management.

Although conventional wisdom assumes that cash is free, the report found that the residents of Delhi together spend 6 million hours and Rs. 9.1 crores (US $1.5 million) to obtain cash. Hyderabad, which is smaller, spends 1.7 million hours and Rs 3.2 crores (US $0.5 million) to do the same, which corresponds to fees and transport costs about twice as high as Delhi on a per capita basis. These fees, along with cash balances and wealth overall, rise in line with age in Delhi.

The report also notes that as women tend to remain in the home, outside of the labor force, their access to cash is cheaper.  Employers, on the other hand, spend the most for access to cash, as they typically handle the largest amounts.  They also appreciate the risks of large cash stocks the most, and most regularly breach their preferred cash ceilings[1].

The full report can be viewed and downloaded here.

About The Cost of Cash report

The report is the product of a research effort that analyzed the most pertinent policy documents, reports, scholarship, expert interviews, and payments data. It is the second in a series of country reports on The Cost of Cash by the Institute for Business in the Global Context (IBGC). The series seeks to ascertain the private costs and risks of cash management facing diverse stakeholders in society: consumers, business, government, and financial systems. It does not forecast the likelihood that cash will fall into disuse, or drop below any threshold in payment market share. It is different from much of the academic work in payment economics, which focuses explicitly on social costs with a view toward informing debates around payment clearing and settlement. Instead, it is analyzed through the private costs to households and businesses that arise from their use of cash, beginning when cash is received and ending when it is spent again. The estimates are based on original IBGC surveys, coauthors’ surveys and interviews, and a broad mix of academic studies and official statistics.

About The Institute for Business in the Global Context

The Institute for Business in the Global Context (IBGC) connects the world of business to the world. It is the hub for international business at The Fletcher School at Tufts University, the oldest exclusively graduate school of international affairs in the United States. The Institute takes an interdisciplinary and international approach, preparing global leaders who can cross borders of many kinds and integrate business skills with essential contextual intelligence. The Institute is organized around four core activity areas: education, research, dialogue, and a lab. The Master of International Business degree and executive education offerings, coupled with original research in the areas of inclusive growth, innovation, and global capital flows, facilitate vibrant conferences, symposia, and speaker dialogues. IBGC gratefully acknowledges support from The Bill & Melinda Gates Foundation, Citi Foundation, Chicago Bridge & Iron, The Global Fund, Hitachi Corporation, Hitachi Research Institute, K&L Gates, MasterCard Foundation, MasterCard Worldwide, Oliver Wyman, The Rockefeller Foundation, Dr. Thomas Schmidheiny, State Street Corporation, and Tata Group.

About MasterCard

MasterCard (NYSE: MA), www.mastercard.com, is a technology company in the global payments industry. We operate the world’s fastest payments processing network, connecting consumers, financial institutions, merchants, governments and businesses in more than 210 countries and territories. MasterCard’s products and solutions make everyday commerce activities – such as shopping, traveling, running a business and managing finances – easier, more secure and more efficient for everyone. Follow us on Twitter @MasterCardAP and @MasterCardNews, join the discussion on the Beyond the Transaction Blog and subscribe for the latest news on the Engagement Bureau.

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[1] Cash ceiling refers to the amount of money above which the respondent is unwilling to hold in cash.