Incentivising ATM-cash and cheques over electronic transactions - A policy gap

Abstract

The country is moving through a phase of dynamic changes in the payment system. This is primarily due to technology coming into play to revolutionise the payment space. Reserve Bank of India (RBI) and the government both have realised the benefits and importance to venture into promoting the electronic payment system of the country to bring in ease, efficiency and accountability. RBI has added a new league of banks called payment banks while the government has planned to incentivise electronic payments in a big way.

Other than maintaining brick and mortar branches, an important head of operational expense for banks pertains to management of cash and cheques. This is a cost not only for banks but also for the government and ultimately through various forms for the economy in general.

There is a high cost of cash to the economy that is not explicitly stated. These include both direct cost (printing/transporting notes, weeding out soiled notes, combating counterfeiting by several means including periodically introducing new series of currency notes and withdrawing existing ones, etc.) and indirect cost (loss of tax revenue, creation/prevalence of black money, etc.). Moreover, cash facilitates crime and above all cash is not ‘swachcha’ (imagine the germs that currency notes carry when we receive balance cash from a fishmonger, a vegetable vendor, an auto-riksha driver or even from an ATM). Moving towards cashless economy is the appropriate way to address these ills. People should make cashless transactions a habit and RBI should impart this important message of financial/depositor education through Depositor Education and Awareness Fund (DEAF).

The digital payments infrastructure already in place can give boost to payments made digitally provided the same convenience and acceptability as that for cash can be attained by policy reorientation. At present RBI’s policies and bank practices are not oriented towards explicitly creating an ecosystem which gives the end users (customers) freedom of choice between payment modes; where there is no imbalance imposed by anomalous incentive/disincentive structures; where cash/paper transactions are not incentivised over cashless/paperless transactions; and where payments which are cheaper for banks to execute are priced favourably over payments which are expensive for banks to execute. In this regard, the policy makers should focus to answer the following question:

“Is it not possible to provide freedom of choice to customers by allowing them few free debit transactions each month and letting them pick economical/efficient/convenient mobile/computer/net based IMPS/NEFT alternatives over the cost-intensive/less-efficient ATM-cash/cheque ones?”

It is prudent to migrate to measures that incentivise cashless/paperless transactions since they are more economical, beneficial and efficient than cash/paper transactions. This Report presents a way forward for encouraging the cost effective electronic payments over cash and cheques. It focuses on the incentives and disincentives in the existing payment space and provides rational policy path, for possible implementation by RBI and the government.