More than 14.5 crore Indians have been issued RuPay cards under the Pradhan Mantri Jan Dhan Yojana (PMJDY). Overall, banks have issued close to 60 crore debit/credit cards to account-holders. Such impressive statistics notwithstanding, the harsh reality is that India, as an economy, still has a long way to go before ‘plastic’ truly becomes an effective substitute for hard cash. This is clearly borne out by the Reserve Bank of India data on the value of commerce put through using debit/credit cards and its proportion to the official data on private final consumption expenditure. Only a tiny fraction what Indians spend on various goods and services is settled through swiping a credit/debit card.

The provisional estimates of national income for 2014-15 released by the Centre in May 2015 puts the private final consumption expenditure of Indian households at a little over ₹75 lakh crore. Against this, these households spent a little over ₹3 lakh crore through point of sale (POS) terminals, using either a debit or credit card, according to the RBI data for the same period, thus giving a utilisation rate of a mere 4 per cent. Ironically, however, the use of debit cards for withdrawal of cash at ATMs is considerably higher, at ₹22.3 lakh crore in the same period — nearly a third of total consumption expenditure.

Antediluvian attitude

Two points can be deduced from this data. One, half the population (proportion of total number of debit cards issued to the actual population) has at least taken a baby step towards digitisation of their financial transactions. Two, for some reason they hesitate to go wholly electronic by not using it to settle their dues for purchases made.

The social structure as it exists today could partly explain this. In a household where there is only one income-earner in the family, the division of household responsibilities would be such that the husband puts the metaphorical food on the table and the wife does everything to make the food actually appear. He doles out the cash in dribbles and the wife takes care of the procurement logistics. It is easy to see that under such an arrangement it is inevitable that digitisation of cash cannot go beyond ATM withdrawal.

It could be argued that this is a dinosaurian perspective, out of tune with the reality of current matrimonial dynamics in Indian society. That may well be the case. The average Indian husband is perhaps a far more enlightened being than what is by the financial arrangement described. So what comes in the way of the husband arranging for an add-on credit card so that the wife has the freedom to make her household purchases and pay for it by swiping ‘plastic’ at the sales counter?

Falling short

Quite simply, this is due to the fact that the number of merchant establishments powered to handle electronic settlements is far fewer than the total number of establishments, big and small, that currently lubricates the wheel of Indian commerce. As the RBI data on Indian payment and settlement systems so helpfully points out, the country had, as of March 2015, roughly 11.25 lakh POS terminals. Even if we assume that there is only one such terminal per merchant establishment (a gross underestimate given the penetration of big-format retail in urban India), this is woefully short of the number required to enable the entire Indian public to go wholly electronic for procuring their day-to-day needs, should they choose to do so.

Just how inadequate this is can be gauged from yet another statistic. In July last year, the Centre released the initial findings of the economic census carried out from 2013 to April 2014. According to this survey, there were as many as 5.85 crore commercial establishments, big and small, dotting the country’s landscape. Out of these, there were as many as 2.40 crore establishments operating under a permanent civil structure outside the household premises, in effect, as traditional commercial establishments.

Given the rate at which the these POS terminal are coming (the last fiscal saw only a growth of 6 per cent with the number growing from 10.66 lakh establishments in March 2014 to 11.26 as of March 2015), it would be decades before all commercial establishments are enabled to undertake electronic transactions instead of cash. The cost of putting in place the infrastructure needed to undertake digital financial transactions through a POS is not so expensive as to put it beyond the scope of a vast majority of commercial establishments. A few thousand rupees for the equipment and a SIM card for a mobile phone are all it takes to be e-ready.

It cannot also be the fear of sales tax authorities and the reluctance to go through the formalities of regulatory compliance. A large number of these establishments would in any case have a turnover that would be below the threshold limit for compulsory registration, which is currently around ₹10 lakh. The average turnover for these 5.8 crore establishments is less than ₹20 lakh. Banks, too, have some commitments towards ‘financial inclusion’ that require them to expand their digital footprint. But in spite of all this, the penetration is poor and is unlikely to improve dramatically in the near future.

Willingness and incentive

The phenomenon of digitised commerce requires the willing participation of all three parties in the ecosystem, namely, merchant establishments, banks and consumers. Unless the incentive system is aligned to meet their needs individually, this is unlikely to happen.

Thankfully it is possible to design such a system that becomes a win-win for all. For the merchant establishment there is every incentive to put in place the POS terminal if the turnover registered through it is recognised for assessing its credit needs through the formal banking system. Imagine a situation where the bank tells a small trader that every a rupee of turnover registered through the POS makes him eligible for a working capital limit of 25 paise (three months’ inventory as working capital) from the banking system; he would be more than willing to install such a device.

For banks it is the opportunity cost of funds that are needlessly withdrawn as cash ahead of actual use by a customer, which is an obvious advantage. It was seen that customers withdrew from bank ATMs as much as ₹22 lakh crore during 2014-15. Every rupee retained within the banking system is worth 3 per cent per annum in return, which is the profit that banks earn on lending, after meeting their cost of deposits. So, if the ₹22 lakh crore were retained in the banking system even for one extra day, it would be worth roughly ₹180 crore for the banking system as a whole.

But a greater advantage is the prospect of banks entering the more lucrative retail trade finance in a big way. Currently they are reluctant to lend to this sector as they have no dependable real-time information on the financial and business operations of such borrowers. By bringing their turnover within the banking system through the installation of POS terminals, banks get a better handle on the retail business of their borrowers. Thus a major business risk in such lending is totally eliminated.

For the individual card-holder too, there is the advantage of seamless transactions that ‘plastic’ affords. Besides, what would a husband not give to know that none of the monies that he is giving to his wife for household expenses is being squirrelled away for a gold chit scheme with the neighbourhood jeweller?