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Moving from Cash to Cashless: Challenges

and Opportunities for India


Bappaditya Mukhopadhyay
Great lakes Institute of Management, Gurgaon
bappa.m@greatlakes.edu.in
bappa.mukh@gmail.com

Abstract:
In a first of its kind study, we estimate the amount and potential for cashless payments made
by households in India. Through an extensive household survey across 8 cities (4 metros)
involving 3066 households, we estimate the extent to which households make non cash
expenditure. We also identify the bottlenecks which prevents households to make non cash
payments. Our key results are;

1.38% of all household expenses are done via non cash instruments (2.92% in urban

and 0.55% in rural).


Approximately 7% (12% in urban and 3% in rural) households make cashless

transactions in one or more items.


For urban India, more than half the households who make cashless transactions spend
5% or more through cashless and almost a quarter of the cashless households spend

more than 10% through cashless.


For urban India, approximately 80% of the households make cashless transactions in

only one item


If the households have an incentive to keep records of financial transactions, they will

have higher chances of incurring non-cash expenditures.


Supply side constraint (that is unwillingness by the seller to accept such payments) is
the biggest deterrence to cashless payments

Thereafter, we develop a predictive model of cashless payments. The results put together
gives us an important policy direction towards what can enable increase in cashless
payments.
We employ logistic regression to identify factors that help us to understand what makes a
household go cashless (in terms of Socio Economics, payment frequency and network effect),
what factors explain the perceived constraints by the households (income status etc).
We then clearly spell out te role of the policy makers and Goverment in promoting cashless
instruments.
JEL Classification: G18, G29, O53
Keywords: Cashless transactions, household survey, network effect, predictive modeling

1. Introduction and Motivation


Worldwide there is tremendous interest among policy makers, academicians and commercial
enterprises to explore the possibility of moving towards a cashless economy. However, cash
still continues to remain the predominant form of transaction. In Europe, it accounted for
78% of Euro 388 billion retail payments in 2008, or nearly Euro 301 billion transactions.1 In
2008, the total cost of distributing, managing, handling, processing and recycling of cash and
that of accepting cash payments was Euro 84 billion or, 0.60% of Europe's GDP. Although it
is expected that there will be a significant increase in the use of cashless payments and a
general decline in the number of cash payments in Europe by 2014, cash will still remain the
continent's main retail payment mode. These European figures are significant. Between 2000
and 2008, such payments grew by160% or at a compounded annual growth rate (CAGR) of
6.2%. In comparison, for the same period, retail cashless payments in the USA increased at a
CAGR of 4.5% to USD102 billion.2 However, the extent to which economies have moved
towards cashless depends crucially on the need for it.
Moodys Analytics(2010) study the impact of card usage on GDP for 51 countries.3 The 51
countries in the samplewhich collectively account for 93% of the worlds gross domestic
productelectronic card usage added $1.1 trillion in real dollars to private consumption and
GDP from 2003 to 2008. Put another way, real global GDP grew an extra 0.2% a year on
average beyond what it would have without card usage. The contribution of cashless
instruments to total consumption and GDP are given in table 1 . Note that India ranks 35 in
terms of cashless to Consumption and 36 in terms of cashless to GDP. Clearly, there are
opportunities for India, especially given that the projected growth rate for Indias
consumption and GDP is higher than most countries in the data set.

1 See EPC (European Payments Council) newsletter


http://www.europeanpaymentscouncil.eu/pdf/EPC_Article_112.pdf

2 Iceland is ranked #1 in terms of proportion of cashless transaction to total transactions in retail sectors. Less
than one sixth of retail transactions are in cash. www.dgwbirch.com/papers/go/go010208.pdf

3Moodys Analytics (2010): http://corporate.visa.com/_media/moodys-economy-whitepaper.pdf


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The study also analyzed the impact that future card usage will have on economic growth. The
study found that a 1% increase in card transaction volume would increase consumption each
year by 0.039% and increase GDP growth by 0.024%. With average annual card penetration
growth of 13%, we see a sizable 0.62% increase in consumption and a 0.38% increase in
GDP due to card usage. For India, a 1% increase in card usage will lead to an increase of
0.007% in consumption and 0.004% in GDP.
There are some important reasons as to why India has to gradually move towards a system of
cashless payments. 4 We categorize them as direct and indirect benefits.
Direct Benefits:
High maintenance costs: The cost of maintaining currency in India is enormous. According
to the Reserve Bank of India, the provisional estimates of the amount of currency in
circulation (as of June 2010) stands at INR 8,64,333 Crores5 out of which only 5% of the
currency is with the bank, implying that almost the entire volume of currency is transacted
every day. Over the period April 2006-June 2010, currency has shown a yearly growth rate of
17%. It is estimated that, for 2009-10, RBI incurred an annual cost of INR 2,800 Crores to
just print the currency notes.6 This is 0.4% of the total currency in circulation. This cost does
not include the cost of storage, transportation, security, detection of counterfeits etc. To the
printing cost, if we were to add the cost of storage and maintaining these currencies through
ATMs alone, the cost of printing and distributing cash constitutes about 0.2% of Indias GDP.
Given the growth rate in the volume of currency, the cost of printing and disbursing will
soon become enormous. In the face of this, a moderate growth of cashless transactions by 5%
a year will save more than Rs 500 Crores annually. Therefore, there is a direct benefit (in
terms of cost savings) of moving towards cashless transactions in India. However, it is the

4 By cashless transactions, we mean all financial transactions that do not involve any
currency.
5 1 crore=100,00,000=10 million
6 Ashish Das, and Rakhi Agarwal (2010), Cashless Payment System in India- A Roadmap,
Technical report, IIT Bombay, http://dspace.library.iitb.ac.in/jspui/handle/10054/1732
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indirect benefits that are perhaps much more important for India, especially given its
objective of inclusive growth.

Indirect Benefits:
There are three distinct yet important indirect benefits from promoting cashless transactions
in India. These are:
(a) It will promote financial inclusion;
(b) It will keep records of financial transactions; and
(c) It will lower transaction costs involving any two parties engaged in a financial
transaction.
While the last observation is in general true for any economy, the first two are particularly
relevant for India.
(a) Financial inclusion
Gangopadhyay (2009), shows that more than half the Indian population is not financially
included.7 Overall 525 of the households have a bank account, thee relevant percentages are
67% in urban areas and 40% in rural areas. There are about 6.3 bank branches for
every 100,000 people in India, less than 3 branches per 100 square
kilometres. For rural India, the numbers are 3.5 branches per 100,000
people and less than 1 branch per 100 square kilometres. In particular, 45
per cent of the rural, 28 per cent of the urban and 38 per cent of all
households in India, admit that access and availability are the main
factors determining their choice of a particular bank. While it is necessary
for financial inclusion that every household should have access to bank,
mere physical access to a bank is, of course, not sufficient. This is
particularly important given that more than 90% of the workforce in India
is in the unorganised sector, and physically accessing banks would mean
huge opportunity costs for them (measured in terms of daily earnings). A
cashless payment system will reduce this cost tremendously. An enabling
system that promotes cashless transactions would, therefore, be the

7 Gangopadhyay, Shubhashis (2009), How can Technology Facilitate Financial Inclusion in India?
A Discussion Paper, Review of Market Integration, 1(2): 223-256.

natural extension of the existing policies directed towards financial


inclusion.8

(b) Financial Records


Recording financial transactions has many advantages. First, it aids the Government to collect
appropriate tax revenues; second, it can effectively detect, and help curtail, illegal
transactions; third, it will give us a better estimate and understanding of the huge
unorganised sector in India; and last, but not the least, it will help plug the leakages in
various Government programmes. Although we do not have accurate estimates of the amount
of black money in the country, if one were to correlate the black money present in the
economy with the black money held abroad, the amount will be enormous.9 With cashless
transactions, almost all transactions will leave a digital footprint. A system that encourages
and incentivises the buyer to pay through cashless instruments (increasing use of bank to
bank transactions without involving the physical currency) will have higher financial
transparency. This is perhaps the most direct way of battling issues in corruption and black
money in India. Digital footprints have other major advantages. It can make public delivery
systems much more efficient. In 2009, the Planning Commission estimated that only 27% of
Public Distribution System (PDS) expenditure reached the targeted low-income groups.10 The
Justice Wadhwa committee report on PDS also finds leakages in the PDS subsidy.11 In fact,
the committee also recommends the use of computerised platforms that will keep record of all
8 For an overall policy framework to enable financial inclusion, see reports by BCG and
TCS. http://www.tcs.com/SiteCollectionDocuments/White
%20Papers/Government_Whitepaper_Financial_Inclusion_09_2010.pdf
9 The estimates according to the Finance Minister is INR 45,00,000 crores! See
http://www.asianage.com/india/indian-black-money-estimated-around-rs-45-lakh-crores-076
10 For criticism of the PDS, see Planning Commission, The Eleventh Five-Year Plan,
Government of India, Delhi, 2009.
11 See http://pdscvc.nic.in/report%20on%20computersisation%20of%20PDS.htm. This is
also substantiated by similar studies conducted by the Planning Commission of India. Though
estimates vary, the conclusion is the same.
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transactions pertaining to the PDS. It is fair to assume that, once the records are maintained,
misallocation of PDS items can be easily detected and be acted upon.

(c) Lower transaction costs


With appropriate technology and instruments, the need to be physically present during any
financial transaction can be dispensed with. This can reduce transaction costs as cashless
transactions often reduce processing costs and waiting times. The process of calculating and
tendering the exact change is often cumbersome and time consuming. 12

Having established the need for cashless payment instruments, the obvious set of questions
that arise are (a) what impedes cashless instruments currently and (b) what should be the
appropriate enabling system to promote cashless?
Market forces alone will not work. This is because of the network effect.
Network effect: Switching from an economy that predominantly uses cash to a cashless
economy would require a concerted effort to develop a network of critical mass that deals
with cashless transaction. The development of this network is important as there is a
switching cost for users to shift from cash to cashless. Network effects are in place when an
addition of one more individual to an existing network of individuals increases the value of
all the members in the current network. This makes it costlier for the existing members to
switch from the current network. Clearly, with each additional transaction conducted in cash
or addition of one individual who wishes to transact in cash, the value to all the members
currently using cash increases. Therefore, for any one from the existing network of cash users
to switch to cashless transaction, the benefits must be significantly higher from doing so.
Simply put, users will find it more attractive to switch to cashless transactions if more users
12 In April 01, 2011, a hike in the toll tax rates by a rupee caused a day-long traffic jam in Gurgaon on the
largest toll gate in India. This expressway is the busiest inter-city route in India and handles more than 180,000
passenger car units (PCUs) daily and is a part of the Golden Quadrilateral project. With toll tax rate increasing
to Rs 21, from the earlier Rs 20, commuters as well as officials deployed at toll cabins were seen struggling to
tender the exact change to commuters, thus causing traffic to slow down on both sides of the toll gates. During
the peak hours, only 25 vehicles passed through each toll gate on an average every five minutes, instead of the
normal rate of 100 vehicles.http://findarticles.com/p/news-articles/times-of-indiathe/mi_8012/is_20110403/extra-rupee-takes-toll-delhi/ai_n57214461/

are using them.13 Any policy to help users shift to cashless transactions would be much more
effective as the size of this network grows. It is important, therefore, that policy initiatives are
in place to develop a critical mass of this network (of non-cash users). This critical mass may
vary across geographies or across sectors. Once it is developed, it becomes more lucrative
for individuals to leave the existing network of cash transactions and join the network
involving cashless transactions.14 Our recommendations to shift towards cashless economy
are based on this network effect.
Rest of the paper is organized as follows. In section 2 we present a backdrop of Indian
Banking structure and the present scenario in the retail industry that is essential for cashless
payments. In section 3, we present findings from our household survey. In section 4, we
present the predictive and targeting models for cashless instruments. Section 5 presents the
role of Government while policy while section 6 deals with the roadmap ahead. Section 7
concludes.

2. Background: Banking Infrastructure and Retail Industry

2.1 Banking Infrastructure


According to Reserve Bank of India (provisional estimates), the amount of currency in
circulation (as of April 2011) stands at INR 9,70,309 Crores out of which only 5% of the
currency is with the bank, implying that almost the entire volume of currency is transacted
every day (see table 2.1).15 This is a growth of 50% in little over two years! Naturally, this
implies a huge cost of printing and maintaining paper currency. How well is the banking
infrastructure equipped to go cashless? What are the instruments that have potential for
highest growth among all electronic payment systems? What are the cities that need targeting
on a priority basis? These are some of the questions we answer in this section.
13 See Oz Shy (2002), The Economics of Network Industries, Cambridge University Press,
for discussions on various network effects involving banks.
14 The popularity of fax machines were driven by the fact that the company realized its
network effect and to make more users hooked onto the network, they initially subsidized fax
machine users. Surely, if only one user has a fax machine, it is useless!
15 1 crore=100,00,000=10 million.
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The banking sector in India has 171 banks (as reported by RBI in 2009). Out of these 166 are
scheduled commercial banks while 5 are non-scheduled commercial banks.
Where does the banking system stand as far as cashless transactions go? In tables 2.2 -2.4 we
present the total volume of electronic payment systems (EPS). The instruments considered
under EPS are ECS (electronic clearing systems), NEFT (electronic fund transfer systems)
and credit and debit cards.16 Note that credit and debit cards still make up the bulk with 55%
of total EPS transactions. The amount (in Rupees) of EPS has increased 25 times in the eight
years (2003-04 to 2010-11). This is a fantastic growth. However it is not uniform across all
the instruments. While ECS (debit) has grown more than 30 times and NEFT by more than 50
times, Credit Card and Debit Card growths have been modest and are only around 5 times.
From a collective share of 43% of total EPS in 2003-04, the collective share now stands at
less than 10% for credit and debit cards put together . In table 2.4, we present the average
amount per transaction. The current average amount per electronic transaction is Rs 14,403.
NEFT (an interbank transfer instrument) has the highest average amount per transaction and
is close to Rs 71,000. The average amount per transaction for credit and debit cards stands at
Rs 2848 and Rs 1632 respectively. Clearly the above numbers suggest that households are not
averse to EPS if it involves interbank transactions but are reasonably averse to using debit
and credit cards. The possible factors that explain such low usage of these cards arehigher
transaction costs, lower transaction amounts, and transaction security. These are the factors
that were brought to light in our household survey. The growth figures for credit and debit
cards are particularly worrisome. The growth rates have been extremely modest whether we
consider the number of transactions or the amount of transactions. What is of particular
interest is the fact that amount per transaction has also grown extremely slowly for credit and
debit cards. Therefore, if the current trend continues, a mere push for increasing the number
of cards will not guarantee a substantial growth in either, (a) number of transactions (b)
amount of transactions.

16 These calculations are done without considering RTGS (Real Time Gross Settlement)
which by itself comprises the highest volume in terms of Rupees. This is because, RTGS are
applicable for transactions exceeding a minimum value. Therefore, very few households
make transactions through RTGS. Amount transacted through RTGS is usually 30 times that
of NEFT.
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Apart from the EPS, the other electronic based system (although not cashless) that is used by
households, is that of ATMs. As on 2010, there are over 60,000 ATMs. However, the ratio of
onsite to offsite ATMs is still greater than one. While, ATMs are actually a process of
converting cashless to cash, any expansion idea must address a proportionately higher
increase in offsite ATMs (table 2.5).
Finally, in table 2.6 we identify the set of 50 cities (either in terms of volume or in terms of
composite growth rate )which are the most banked as well as have the highest growth
potential. These cities were identified using two criteriontotal volume (in terms of deposits
and credits) as well as composite growth (deposit and credit growth). The total volume
(deposit and credit) in India is Rs 87,33,239 Crores while the composite growth rate for all
banks together is 22%. Not surprisingly, Mumbai, Delhi, Bengaluru, Chennai and Kolkata
make up the top 5 spots. As banking infrastructure and its vibrancy is very important for
moving towards cashless economy, targeting cities for cashless must begin with cities chosen
from the list. Interestingly, almost all of the top 50 cities exihibit CAGR exceeding 15%. This
shows a healthy trend.

The key points discussed about the banking infrastructure can be summarized as follows;

The amount of currency with the public is 95% of total currency.


Electronic cards (Credit and Debit) constitute the bulk of these transactions around 56%
however the share of cards in total amount of EPS transactions is less than 10% and the
amount transacted per card is less than Rs 3000 for credit cards and little over Rs 1500 for

debit cards.
The top 10 banked cities constitute about 50% of all banking volumes.
There are more than 50 cities which have a banking growth rate (measured through

growth rate of deposits and credits) double digits and these are 50 cities make up
about 63% of the total banking business.

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2.2. Indian Retail Industry


The Indian retail is divided into organised and unorganised sectors. Organised retailing refers
to trading activities undertaken by licensed retailers, that is, those who are registered for sales
tax, income tax etc. These include the corporate backed hypermarkets and retail chains and
also the privately owned large retail businesses. Unorganized retailing, on the other hand,
refers to the traditional formats of low cost shops often owner manned general stores,
paan/beedi shops, convenience stores, handcart and pavement vendors etc (CCI, 2008).17
Usually these are the shops employing at most 2-3 employees and operate in less than 100
square feet area. Retail is the largest source of employment after agriculture and constitutes
about 10% of Indias GDP. The current prevalence of cashless and its future scope in India
depend upon the growth of retail sector in general and organised retail in particular. This can
be seen in two important statistics. Extrapolating the ICRIER estimates our estimates for 201011 is 550 billion dollars for the retail sector out of which organised retail is a mere 22.85 billion
dollars (4.1% only) (table 2.7) The expenditure on food and groceries alone constitute 54% of
total retail expenditure. All other sectors contribute less than 10% individually. Clothing and
footwear contributes 43%, while furniture, furnishing and appliances (essentially consumer
durables) constitute 19%. Further, proportion of organised retail to total retail for clothing and
footwear stands at 21% and it is 13% for furniture, furnishing etc. The estimates can be cross
checked with the numbers obtained by NSSO Consumption Survey (NSSO, 2009). These
estimates are based on MPCE (Monthly Per Capita Consumption Expenditure). Food items
contribute to approximately 59% of total expenditure in rural households and 47% of total
expenditure in urban households. Among the non-food expenditure, clothing and footwear
contributes the highest percentage for both rural and urban households. Given that expenditure on
food items is the highest, a close scrutiny of items within the food sector is worth investigating.
The top three items, cereals and associated products, milk products and refreshments/beverages
constitute around 57% of the food consumption items across rural or urban households.

The key findings from the retail industry are:

17 CCI (2009), Retail Industry in India,


http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf
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The estimated retail industry is Rs 25 trillion. However, the estimated organized retail
is only a little over Rs 1 trillion. There are around 450000 estimated POS devices

installed.
Food & Grocery has the highest share (in terms of volume) in retail (approximately

55%).
Clothing and footwear has the highest share (in terms of amount) among organized
retail at 43%. Clothing and footwear also has the highest share (in terms of volume) of

organized to total retail at approximately 22%.


The share of organized to total retail can be expected to rise in only three sectorsClothing and footwear, furniture, furnishing and appliances and books and
entertainment.

The above observations are important to identify the roadmap for cashless transactions in India.
However, in order to get there, we need the cashless estimates of all the transactions carried out
by retail outlets are crucial. We estimated the cashless proportions through to separate surveys.
We survey around 3066 households from eight cities. 18 In section 3 we present the findings from
the household survey while section 5 has the findings from the enterprise survey.

3. Cashless Transactions by Households


3.1 Survey Design:
The major initiator of cashless transactions, as with all other countries, comes from retail
purchases triggered by households. It is, therefore, vital that we understand the extent to
which households use non cash instruments --- across sectors, consumption items and
geographies. We also need to asses some of the reasons (both perceived and otherwise) why
different items have different proportions of non-cash expenditure. We carried out a
household survey across 8 locations that had rural as well as urban households. In all, we
interviewed 3066 households through a structured questionnaire. The households were
identified based on their socio economic classification (SEC). The SEC classifies households
according to occupation and education.

18 We employed Hansa Research to carry out the field survey.


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The Socio-Economic Classification (SEC) in the urban area can be segregated into A1, A2,
B1, B2, C, D, E1 and E2. The classification is done according to the occupation and
education levels of the chief wage earner of the household (table 3.1). The rural area is
segregated in to R1, R2, R3, R4. This classification is done on the basis of the type of house
of the household and the education level of the chief wage earner (table 3.2).

It is important to note that in India, 93% of the labour force is in unorganized sector. This
means, reliable income estimates for 93% of the population is unobtainable. Indeed, the most
accepted income surveys in India are through proxies. National Statistical Survey
Organization (NSSO) conducts Consumption surveys, results of which are used to proxy
income. We decided to adopt the SEC classification for our survey because we have to make
our survey estimates across cells compatible with other estimates. We selected 5 urban
categories (SEC-A1, A2, B1, B2 and C) and 1 rural category (R1). Four metros Delhi,
Mumbai, Kolkata and Bengaluru were selected along with four tier I cities-- Kanpur, Surat,
Jaipur and Vishakhapatnam. The geographical spread ensured that we had adequate
representation from all the four regions of the country. The four tier I cities also had rural
areas in the outskirts of these cities. Our sample of rural households was drawn from these
areas. We restricted our survey to only 6 SEC (out of possible 12) and 8 locations, as these
are the types where one can observe some significant cashless transaction.19 Further, among
all the available SEC households, we only surveyed those households which had a bank
account. This was necessary as cashless transactions without a bank account is almost
impossible. The survey was conducted during October-November, 2010. In table 3.3, we
present the sample size per cell.20

19 In addition to the above, we also surveyed a few households from SEC R2 in Jaipur and
Kanpur who had bank accounts. True to our assumption, we did not find any cashless
expenditure among these households.
20 The SEC classifications were done for sampling framework. We do not wish to present the
results by SEC category as we believe that cashless policy initiatives should not be targeted
by SEC.
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The survey questionnaire gathered information on household demographics as well as details


on aggregate expenditure (30 day recall or 365 day recall depending upon the expenditure
item), the expenditure incurred through cash and the possible reasons for not using card or
cheques to incur these expenses. The expenditure items were broken up into 25 distinct items.
These items can be mapped at an aggregate level to the various expenditure items that are
followed in NSS consumption and expenditure round surveys. The population estimates are
used as multipliers per cell. The population estimates are obtained through IRS (India
Readership Survey), Q3, 2010
By restricting ourselves to the six SEC categories in our sample framework, we are implicitly
assuming that cashless transactions in the remaining socio economic categories are
negligible. This implies that, given our sample framework and the population numbers we
can obtain at most 49% of the households in urban India (proportion of households in SEC
A1, A2, B1, B2 and C over total urban household population) and 4% of the rural households
(proportion of households in R1 to total population of rural households) who can make
cashless transactions.
3.2 Key Results and Estimates
In table 3.4 we present the proportion of households who incur non cash expenditure per
item. For any given item, column 2 gives the percentage of households (all India) who incur
non cash expenditure while column 3 and 4 gives the equivalent numbers for urban and rural
India. These estimates are obtained by simply counting the percentage of household, who at
an aggregate household expenditure level, incur less than 100% payment by cash. Some
interesting facts immediately emerge. One, there are approximately 6.92% households at an
all India level who have incurred non cash expenditure in at least one item. The
corresponding numbers are 12.34% for urban India and 4.4% for rural India. Given that 12%
of the total households incur non cash expenditure, it appears that the willingness or
awareness of households for making non cash payments are not negligible wherever it is
feasible (either by choice or by design). This simply means that households are not averse to
non cash expenditure. However, on how many items and to what extent they incur non cash
expenditure was the object of our survey. If anything, the above numbers suggest that, if there
is a bottleneck, the effort to move towards non cash expenditure should be more pronounced
to remove the supply side bottlenecks --- that is, enabling more and more providers of goods
and services with the appropriate incentive and infrastructure to accept non cash payments.
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Looking at the item wise break up, we find that the top 10 items that have the highest
percentage of households incurring non cash expenditures are almost identical for both rural
and urban areas. Note that, while there are 15 prominent items (that have at least 1% or more
households incurring cashless expenditure) in urban India, the number is only one for rural
India. Interestingly, Education expenses in rural India attracts the highest percentage of
households making non cash payments while durable goods see maximum number of
households making non cash expenditure in Urban India.
In table 3.5 we provide the proportion of non-cash expenditure per item. For any given item,
column 2 gives the percentage of households (all India) who incur non cash expenditure
while columns 3 and 4 give the equivalent numbers for urban and rural India. At an all India
level, 1.38% of all expenditure is in non-cash instruments. The corresponding number is
2.92% for urban India and 0.55% for rural India. Some interesting facts that emerge out of
the numbers are as follows. One, in urban areas, almost all the items have at least 1%
expenditure in non-cash while in rural India, only six of the items have non cash expenditure
that is 1% or more of total expenditure for that item. This means that for urban areas, while
one can make larger payments through non cash modes, the same may not be possible in rural
areas. The item that has the highest non cash expenditure are house rents. Note that, most of
rural India does not stay on rented accommodation. Increasing property prices in urban India
therefore amounts to rents being the highest non cash component.
Result1: Approximately 7% of Indian households make cashless payments (in atleast one
items), however these payments amount to only 1.38% of total household expenses. The
corresponding numbers are 12% and 2.92% for Urban India.
What does the above two facts signify? For urban parts, the demand side bottleneck is not as
prominent as the supply side bottleneck. This can be seen from the fact that 12% of urban
households are aware and do incur cashless expenditure. Further, there are five items where
households spend more than 5% through cashless instruments. For rural areas too, the
supply bottlenecks seem to be more binding. Here too not a negligible percentage of
households incur non cash expenditure (4.43%). However, in none of the items, the share of
cashless payments exceed 5%. To establish that demand side constraint is not as severe as
supply side constraints, we consider two slices of the data. One, we focus on the urban data
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and two we look at frequency of cashless transactions as well as amount of cashless


transactions.
If we employ a slightly stricter definition of households involved in making cashless
payments, some interesting facts emerge. We first classify households across 3 categories
based on frequency low (households making cashless transactions in 2 or more items),
moderate (households making cashless transactions in 5 or more items) and high
(households making cashless transactions in 10 or more items). We find that 2.5% of the
households are in the low category, 0.74% are in the moderate while only 0.16% are in the
high category. As a percentage of all those households who make cashless transactions, the
numbers are 20.21%, 6.03% and 1.31% respectively. This clearly shows that , although there
are households who make cashless transactions, very few engage in multiple items (i.e.,
approximately 80% of the households make cashless transactions in only one item). Clearly
this establishes that even though households are exposed to cashless instruments, there are
not too many items they find are convenient to make such payments. We then classify
households according to cashless expenditure proportions. We classify them as either
moderate (households with cashless transactions amount exceeding 5% or more) or high
(households with cashless transactions amount exceeding 10% or more). We find that
6.52% are in the moderate category and 2.84% are in the high category. As a percentage of
all those households who make cashless transactions, the numbers are 52.88% and 23.04%
respectively. This is interesting. It states that, more than half the households who make
cashless transactions spend 5% or more through cashless and almost a quarter of the cashless
households spend more than 10% through cashless. This clearly shows a skew. Households
are reluctant to use non cash instruments in most items but, whenever they do, a significant
portion of them use considerable amounts of non cash expenditures.

Let us now inspect in greater detail, the items that have prominent cashless expenditure. Note
that, given the extremely low percentage of cashless expenditure for any item in rural parts,
the overall prominent items are those which are also prominent in urban India. Therefore, we
focus on the possible reasons that hold true for urban India.

16

Some of the most prominent items (each of them having at least 3% cashless expenditure)
are: rent, clothing & footwear, electricity, telephone and mobile bill payments, education and
conveyance. These are 7 out o the top ten items. There are some distinct factors that explain
why some items have higher share of non-cash component. To understand them, one has to
go deeper into one of the crucial aspects of non-cash payments i.e., keeping record of
financial transactions.
Result 2: If the households have an incentive to keep records of financial transactions, they
will have higher chances of incurring non-cash expenditures.
Such incentives are often inbuilt into most salary contracts. Most salary contracts have an
explicit reimbursement (allowance) for rent, communication (usually telephone bills),
conveyance allowances as well as educational expenses.21 This means that keeping record of
financial transactions for these items are in the interest of the households in order to claim
reimbursements. Given that non cash expenditure keeps digital footprints, it makes
payments using non-cash instruments more likely.
However, it is not the inbuilt incentives alone that promote cashless expenditures. Apart from
incentives to keep financial records, often mandatory requirements and infrastructure to
accept cashless instruments promote cashless transactions. One example of mandatory
requirement concerns payment of electricity bills. Paying electricity bills in various areas is
mandated by law to be paid through cheques if the bill amount exceeds a certain value.22
Apart from the incentive and the mandatory requirements, the infrastructure (on the suppliers
side) and the transaction amount plays an important role. Consumer durables involves large
amount of financial outlay per transaction. This means that households often prefer to pay
using non cash instruments to avoid the cost of carrying large amount of currencies. Petrol
cards which are often issued by petrol pump stations are used to incur fuel expenses.
21 Rents usually form a large part (approximately 30% ) of the salary and also attracts the
highest tax rebate. Telephone bills are usually reimbursed for most professionals while
educational expenses for children (apart from books and periodicals) are reimbursed in many
organisations. Apart from this, salary contracts have travel allowance, uniform allowance as
well as perks in the form of meal coupons. Note conveyance allowances also have almost
1% share of cashless component.
22 DHBVN, the main distributor in South Haryana mandates that any amount exceeding INR
2000 must be paid through cheques.
17

Therefore, eventually whether the transaction will involve cash or not crucially depends on
whether the seller has the necessary infrastructure to accept non cash payments.

The obvious issue therefore is how to encourage households to start using cashless
instruments. For this we need to investigate the possible reasons that prevent cashless
transactions. These reasons are given in table 3.4. The five main reasons (that account for
almost 94%) for not using cashless transactions are (1) seller does not accept them (2) the
transaction amount is small (3) extra charges are levied for using non cash instruments23 (4)
non cash expenditures are unsecured transactions and (5) not aware. Apart from the
transaction amount being small the remaining four reasons for not using cashless
instruments can be addressed through appropriate policy framework. We find that the top
three reasons for most of the items are (1), (2) and (5). Therefore, the possible steps that can
be taken must involve the following:
The single most important deterring factor across all items is the reluctance on the part of the
seller to accept non cash payments. The overall average (38.52) as well the response for each
item is significantly greater than other reasons. This means that possible intervention on the
supply side will be more effective than the demand side. Therefore, direct intervention in
terms of incentivizing sellers to accept non cash payments would have the maximum impact.

4. Predictive Modeling for Cashless Transactions

4.1 A Simple Theoretical Model of e payment feasibility the network effect


The simple model we present here is based on Shy (2001).24 Although the original model is
based on why individuals learn different languages, we adapt the simplistic framework here
to drive home some key points.
23 In India merchants often levy 2% extra charge on transactions done through credit or debit
cards.
24 Oz Shy (2001): The Economics of Network Industries, Cambridge University Press

18

4.1.1. Basic Model


Consider a country with a population of

. The country has two major financial

platforms- a platform depended upon currency transactions (C) and another that depends
upon Electronic transactions (E). Let at any point in time, the number of

C
people/institutions who use currency transactions are
transactions are

C E
. Note,

and who use electronic

KC , K E
. Let

be the cost of using a different

platform for transaction than what the individual currently uses. That is,

KE

is the cost an

individual who carries all her transactions electronically, wishes to use cash in a

KC
transaction, while

is the cost an individual who carries all her transactions by cash,

wishes to use cashless transactions. The interpretation of this cost is as follows: For
individuals using platform C, it is the cost of learning or being comfortable with new
technology, while for individuals using platform E, it is the cost of carrying physical currency
for any financial transaction.

C E
A.1:

K E KC 0
and

Data from our survey confirms the above assumption. One, the number of households who
make non cash payments are much smaller compared to those who make and often
households attribute transaction costs (reasons 1,3 and 4 for not using cashless) as
significant.

Let

is the benefit from doing a financial transaction. We will assume that the benefit

EC
of dong the transaction is the same for both the groups. Further let

CE
and

be the

number of users of electronic payments who also use cash transactions and the number of
cash users who are trying to use e payments, respectively. Note that, individuals who do not
have electronic cards do not have the option of using them, while individuals with electronic
19

cards always have the option of using cash. Therefore, the cost of switching from cash
to cash less transaction is more than the reverse. In this model, we are mainly interested in

C CE 0
identifying conditions for equilibrium where

, that is identify under what

conditions will more and more people without e payment cards will adopt that platform.

UC
Define

and

UE

as the utility to cash and non cash users respectively. The utility depends

upon number of individuals they can connect with. Therefore,

U C C EC .........(1) if the cash users do not want t o use cashless instrument s


U C K E ...........(2) if the cash users do want to use cashless instrument s
U E E CE .........(3) if the cashless users do not want t o use cash
U E K C ...........(4) if the cashless users do want to use cash

The above expressions are self explanatory. Consider all the traditional cash users. In the
event they do not want to use any non cash instrument, they can only use platforms that
accept only cash. That means at most they can connect with all those ones who are traditional

C
cash payments (

) as well as all those, who prefer electronic payments, but can make cash

EC
payment (

). Given that the benefit from connecting with each of them is

, the total

C EC
benefit is

. This is equation (1). However, if the household decides to invest in

electronic payments he incurs a cost

KE

. However, he can now connect with the entire

C K E .
population. The net benefit in this case is therefore,

Similarly, equations (3) and

(4) represent the utility to all those who are predominantly non cash households.
We make a key assumptions now.

20

A.2: Individuals know that they are small


Each individual treats the number of individuals using different platforms as constants
and invariant with respect to his/her own choice of whether to use different platforms.

EC , CE
Therefore, equilibrium is a pair

where, people with a particular platform adapt

to other platforms because it is beneficial for them to do so. Note that, as having an e
payment card already gives them an option to use cash but not vice versa, we need not
worry whether in equilibrium these group also `switches over.

E EC K E
Therefore, in equilibrium, people will adopt electronic platforms iff;
Proposition 1: If all individuals using electronic platforms also start using cash, then no
individual using cash lead platforms will move to e payments.

Proof: The proof follows from the fact that, if all individuals using electronic platforms

E EC 0
also start using cash, then

as now the traditional cash users can connect to

every individuals. Therefore, they will not incur

KE

and adapt to electronic platforms.

Note that the corollary is also true, that is, if all individuals using cash also start using e
payments, then no individual using electronic platforms will encourage cash transactions.
However, this scenario is not of particular interest to us as we wish to identify the
conditions when households adapt to e payments. So what are the possible equilibria? From
the previous result it is evident that it will be never the case that both groups will
simultaneously incur costs to adapt to the other platform. Therefore, the three possibilities in

equilibrium are

E ,0 0, C
,

and .

0,0

In the first equilibrium, all e payment users also

use cash but no one from cash transaction moves to e payments. In the second equilibrium, all
cash users move to e payments while in the third equilibrium, the wedge between the two
groups of users prevail.

21

Note that if,

KE
KC

E EC C CE

E ,0

the fact that for

is the equilibrium, then

.. This follows from

C CE K C

E ,0

to be an equilibrium, both

E EC K E
and

0, C ,
should hold simultaneously. Similarly, if

is the equilibrium, then

KE
KC

E EC C CE
.

Finally, if {0,0} is the equilibrium, then,

K C , K E Max C CE , E EC
.

Note that, if more and more individuals have to move to electronic banking, then the cost of

switching to cashless payments (

KE

) has to be extremely low.

4.1.2. Welfare:
Social welfare,

W CU C EU E
is the sum of individual welfare. Therefore,

. The

welfare outcomes corresponding to the three equilibrium scenarios are

W E ,0 2 E K C

W 0, C 2 C K E
W 0,0 E C2
2

The welfare scenario we are most interested in is the one where more individuals adapt e

W 0, C
payments that is,

. Given A.1, this implies that this is an inefficient outcome,

W 0, C W E ,0
as

. The intuition is simple, more people has to pay higher switching costs

to get into cashless transactions. It is also easy to argue that, for a sufficiently low cost of
using cash currency, the most optimal outcome is one where all e payment transactions also
22

allow cash transactions. However, this would mean that eventually, the conversion of
traditional cosh transactions to electronic ones will at best be at a slender pace if overall
welfare need not be compromised.
What are the possible solutions to this problem? In our mind, there are two areas of
concern that can help more and more people use electronic transactions. They are,
(1) the possibility of decreasing the cost of converting to electronic transactions. In

K E KC 0
out model this means

(2) ensure that the perceived benefits for an equivalent money amount transaction is
more with electronic transaction than cash based transaction (in out model this
means different . In particular the perceived benefits with cashless payments much be much
higher than those with cash.
It is therefore, when the costs of using e payments is almost negligible, the e payment
platform will expand. This means, not only the direct costs, but indirect costs of
documentation, etc should be minimal. Note that, once a sizeable mass of people use the
e payment network, the requirement of negligible costs are not required. This is the
crucial part in economies characterized by network economies.
In the next section, we present the empirical findings along with the predictive modelling of
what drives (or impedes) cashless payments.

4.2
5. Role of the Government

Our discussions from household and enterprise surveys bring out two reasons that are
common and plaguing cashless transactions tremendously. Firstly, low acceptability of
cashless transactions and secondly, high transaction costs. The role of the government is
prominent in removing both these bottlenecks. It needs to create the critical mass or network
23

thereafter which, cashless transactions will be easily acceptable and convenient across
parties. Furthermore, it needs to play its role as the policymaker in helping to reduce
transaction costs. Finally, the Government is also an important sector for consumption as well
as employment generation. It can be a direct contributor to cashless transactions by playing
its role as a buyer as well as employment generator. In this section, we will investigate these
three roles of the Government.

5.1 Role of the Government in developing the network: Country experiences


It is evident that in order to develop a critical mass of people using cashless instrument, it is
important that exogenous shocks to the system are given to build up the network. How did
some of the countries which have a reasonably large proportion of cashless expenditure,
achieve this? The theory behind this new order of electronic money dominance is certainly
attractive but the actual implementation of such a system is daunting. The pioneers are
typically East Asian, with Singapore keen to develop a cashless society through the use of
CEPAS (Contactless e-Purse Application) stored-value cards. Their aim is to use these cards
to replace those small cash transactions that are most prohibitive to a cashless society such as
public transport and retail services. For example, in the public transport, the cost of
processing small currencies (to tender exact fare) costs substantial in terms of time usage.
Singapore, one of the economies that have higher percentages of cashless transactions, started
moving towards cashless economy as a long run policy initiative almost three decades ago.
The National Campaign to Minimise Cash Transactions was launched on 14 March 1985 to
urge Singaporeans to carry out their transactions electronically. The three-month long
campaign had three specific goals: to encourage Singaporeans to receive their pay through
direct credit to the bank, to persuade them to pay their bills electronically via General
Interbank Recurring Order (GIRO), and thirdly to promote payments through the Electronic
Funds Transfer at Point of Sale system (EFTPOS). On January 1984, a 17-member
COMMICT (Committee to Minimise Cash Transactions for Manpower Savings) was set up
to carry out the quarter-million dollar campaign. Members of the public were educated
through video shows, automated teller machines (ATMs), demonstrations and hands-on
exhibits provided by thirteen organisations, mainly banks and computer companies.
Awareness was also created through mobile exhibitions set up at People's Park Centre and
24

Parkway Parade. During the campaign, advertisements were taken out and workers also
received letters and brochures promoting the conveniences of cashless paydays. To answer
public queries, the Ministry of Finance also set up a hotline number. The notion of cashless
paydays was introduced. Though cashless paydays for government departments have been
around since 1972, only 51% of the 1.04 million workers were receiving their salaries
through direct credit during the start of the campaign. The government also aimed to bring in
the private sector and to increase the number to at least 70%. Letters were sent out to
employers, encouraging them to pay their employees through the bank instead of cash. The
Housing and Development Board (HDB) also relaxed its rule on ATM locations so more
ATMs could be added to meet the increased demand. To ensure the smooth implementation of
cashless paydays, employers were encouraged to stagger their paydays so demand for bank
services could be distributed more evenly. The second phase of the campaign was to
encourage members of the public to pay their bills through General Interbank Recurring
Order (GIRO). It was reported that 40 million bills paid to government departments and
statutory boards were done so in cash. In a year, only a million payments were received by
cheque and five million payments were made by GIRO. The third and most challenging part
of the campaign was the implementation of accepting electronic payments at point of sales
(EFTPOS).25 To boost, EFTPOS, ten thousand people and thirty-nine retail outlets took part
in a pilot scheme in June 1985. The participants of the scheme comprised of the five top local
banks, major retailers, petrol companies and selected government departments were roped in.
Gradually electronic money (more commonly known as stored value cards in the local
context) in Singapore became the usual mode of payment for most services (including public
amenities). These cards can be categorised into single purpose stored value cards (SPSVCs)
and multipurpose stored value cards (MPSVCs). SPSVCs can only be used to pay for goods
and services offered by the issuer (eg prepaid phone cards). In contrast, a MPSVC also allows
cardholders to pay for goods and services offered by other merchants or organisations.

Mexico is one of the first countries in the world whose legislature may actually ban very
large cash transactions of a certain nature. Mexicos reasons are obvious, they need to fight
against illegal drug trafficking and ensnare tax evaders. In Greece too, any cash transaction
25 For the evolution of cashless system in Singapore, refer to www.bis.org/cpss/paysys/SingaporeComp.pdf

25

above the value of Euro1500 will be under the scanner. This is part of an austerity drive given
the financial precariousness of Greece. In Italy too, discussions are in place such that any and
all cash transactions greater than the value of Euro5000 may be outlawed. All of this is being
done to clamp down on tax evaders.26

One of the widely followed success stories of cashless transactions and financial inclusion
concerns M-PESA. M-PESA is a branchless banking service, meaning that it is designed to
enable users to complete basic banking transactions without the need to visit a bank
branch. The continuing success of M-PESA, in Kenya, has been due to the creation of a
highly popular, affordable payment service with only limited involvement of a bank. From its
launch in March 2007, the client base had swollen to 6.5 million by end 2009. What helped
the fantastic growth was the combination of two factors growth of mobile phone usage and
ready acceptability at various outlets. Although the Government was not explicitly promoting
M-PESA, it created enabling systems that made it easier for individuals to use the
instrument.27 The success of M-PESA was soon emulated elsewhere. Notably in Afghanistan,
M-PESA was initially used to pay policemen's salary, which was set to be competitive with
what the Taliban were paying the new recruits. Soon after the product was launched, the
Afghan National Police found that under the previous cash model, 10% of their workforce
were ghost police officers who did not exist; their salaries had been pocketed by others.
When corrected in the new system, many police officers believed that they had received a
raise or that there had been a mistake, as their salaries rose significantly. The service has been
so successful that it has been expanded to include limited merchant payments, peer-to-peer
transfers, loan disbursements and payments

26 http://business.feedfury.com/content/45162601-the-cashless-society.html
27 Allowing M-PESA to pay for public transport was one such initiative (see Tonny
Omwansa (2010), M_PESA: Progress and Prospects: Case Discussion,
http://www.strathmore.edu/pdf/innov-gsma-omwansa.pdf
26

Two facts stand out from the above country experiences. One, the Government plays an
important role. This is not surprising given that moving from one payment system to the other
not only requires approval of new payment systems, but also appropriate regulatory regimes.
Most importantly, the Government has to participate actively in developing the critical mass
in the network. Two, the road towards cashless is determined by what are the priorities of the
Government.

For India, given the development objectives of the Government, it is essential that developing
a system of cashless transaction is consistent with inclusive growth. This can be achieved by
an enabling system, policies that encourage certain instruments and platforms are desirable
than out right banning of certain instruments and platforms.

5.2: Creating the platform: Role of UID

Financial service is one of the most important requirements for the currently
excluded segment. And given that one of the key objectives of constituting UID
is to extend the delivery of services to the currently excluded, UID is actively
looking to facilitate the delivery of financial services.
In this regard, UIDAI believes that the plan of issuing Aadhaar numbers to the
intended 60 crore residents over the next 4 years and setting up an online
biometric authentication service will help address many of the current challenges
faced by the banks in delivery of financial services. While covering the entire
country may take some time, we believe that these initiatives will ease a large
portion of current challenges and will help banks accelerate the accomplishment
of a much deeper penetration of financial service delivery in the country.28

28 Discussion Paper on Aadhar Based Financial Inclusion


http://uidai.gov.in/images/FrontPageUpdates/discussionpaperonaadhaarbasedfinancialinclusio
n15oct.pdf
27

How will the UIDAI achieve this? In other words, how does a mere UID help solve the last
mile problem? The process of financial inclusion based on UID primarily is linked to UID
enabled mobile payments. The architecture of such payment structure is clearly highlighted in
the draft prepared by UDAI.29
A critical part of the UID-enabled micropayments architecture is the direct deposit of
government benefits into the accounts of the beneficiaries. Government departments should
be able to disburse benefits by simply generating a list that contains a UID in one column, the
linked bank account in the next column and the amount in the last column..
Two critical pieces of infrastructure are required to implement UID-enabled disbursement of
government benefits:
1. Government departments must have IT systems that maintain a list of beneficiaries by
UID, and track any program specific information required for disbursing the benefit. At the
time of disbursement, a list of UIDs and amounts are generated and sent to the bank servicing
the concerned government department.
2. A nation-wide payments infrastructure can then distribute payments into beneficiarys
accounts using their UIDs.

5.3 Direct Contribution to Cashless by the Government

There are large number of nodal points of interaction between a citizen and the Government.
The obvious role of the Government in those cases will be to make cashless transactions
mandatory for certain payments and make it mandatory for certain services exceeding a
certain amount. For example, payment for passports can be made mandatory through cashless
(online payments or bank drafts). While payments of various taxes (income, sales or excise
duties) can be made mandatory through cashless modes. In addition a tax rebate (of say 1%
29 From Exclusion to Inclusion with Micropayments
http://uidai.gov.in/UID_PDF/Front_Page_Articles/Strategy/Exclusion_to_Inclusion_with_Mi
cropayments.pdf
28

to 2%) on payments made by households as salary to unorganized sector (domestic servants,


sweepers etc) can boost cashless payments. This will do two things, One the households will
have an incentive to go cashless and two, large portion of the unorganized sector will be
financially included. Apart from the incentives and mandatory prescriptions of cashless
mentioned above, there are some direct Government programmes and initiatives where it can
create a large platform for cashless transactions.

There are two broad areas where the Government can promote cashless transactions that will
be quick, efficient as well as have an enormous impact. These are (a) cashless instruments to
avail PDS, and (b) encouraging cashless transactions with Mahatma Gandhi National Rural
Employment Guarantee (MNREG) payments.

Cashless transactions and PDS:

In India, food security for the poor is addressed by the Government through the Public
Distribution System (PDS) to the beneficiaries who possess the Above Poverty Line (APL),
Below Poverty Line (BPL) and the Antyodaya cards. However, although Government has
been allocating funds for PDS, only a fraction reaches the intended beneficiary, due to
leakages, wastages and a system of clogged pipes. According to the Wadhwa Committee
report PDS is inefficient and corrupt. There is diversion and black-marketing of PDS food
grain in large scale. The poor people never get the PDS food grain in proper quantity and
quality. Given the high leakage in PDS, a natural question that emerges is whether cashless
transactions will plug these leaks. The Wadhwa committee explicitly recommends this as one
of the possible solutions.
How will cashless transactions help? Indeed, cashless transactions (through a pre loaded
card) will ensure that a record of the transactions is kept with both the PDS shop as well as
the households. This will make the PDS much more accountable as the supply in the stock,
the actual distribution, quantity distributed, prices charged will all be now recorded. A simple
pre loaded card that can be used at POS will capture this data. Analysis of the survey data
29

from Raghuvir Nagar further shows that household expenditure on PDS items are around
15% of total household expenditure for BPL families.30 Given that the intended PDS
beneficiaries (BPL and Antyodaya) are around 80 million households in India, including them
in the cashless network would immediately ensure three things (a) total number of
households who use cashless will increase by at least 5 times the current figure (b) an
immediate cashless transaction of close to Rs 4000 Crores and (c) a PDS system that is
efficient. The calculations follow from the fact that our survey shows less than 20% of all
urban households and less than 10% of all rural households use cashless transactions. Given
that these numbers are based only on those households having bank accounts, the total
number of households who has ever used cashless transactions will not exceed 15 million.
The PDS beneficiaries are least likely to be among these 15 million. Therefore, any move that
brings them in the network immediately boosts the network size by at least 5 times and at a
healthy 100 million! Further, given that the Government uses around Rs 280 billion per year
as PDS subsidy, this immediately means that if cashless transactions are made mandatory at
FPS (Fair price shops) (approximately 5 lakhs in all), there will be a savings of around INR
100 Crores per year alone on printing and managing currency!31 Operationally, using
cashless instruments to access PDS is not difficult. It can be mandated by law that PDS
payments can only be made through a pre paid loaded card. This would mean that a digital
footprint of all PDS transactions can be maintained thereby preventing most leakages!32

Linking Cashless Transactions with MNREGA:

One of the determinants of whether a cashless transaction will be initiated by a household


will depend upon whether the household gets its receivables in cashless instrument. This is
30 With a PDS that is less prone to leakage and is more efficient, this percentage can increase
further as many households receive only about 60% of their entitlements in the current
scenario.
31 For PDS subsidies and other numbers see
http://uidai.gov.in/images/FrontPageUpdates/uid_and_pds.pdf
32 Lately, there is a growing debate about replacing PDS by direct cash transfers. These
direct cash transfers should be made through bank accounts.
30

because, if the receivables to a household are only in the form of cash, then to make cashless
payments, the household will have to incur extra cost to convert them to cashless instruments.
Given that 90% of the workforce in India is in the unorganized sector and almost the entire
rural population is in the unorganized sector, the chances of rural household receiving
payments through non cash instruments are minimal. Therefore, this acts as a natural barrier
in using cashless transactions in rural parts (apart from fewer sellers willing to accept them).
The obvious role the Government can play here is to encourage cashless transactions through
its largest programme- Mahatma Gandhi National Rural Employment Guarantee Scheme
(MNREGS). Nearly 84 per cent of the total wage payment under the rural employment
guarantee scheme was made through banks and post offices in 2009-10.33 The total wage
disbursed to the unskilled workers under the MNREG Scheme in FY'10 stood at Rs 25,634
crore and the amount paid through banks and post offices accounted for Rs 21,625 crore.
This meant a total of 9.2 crore individual and joint, bank and post office accounts, with banks
alone accounting for 5.0 crore accounts. This has drastically reduced the leakages in the
scheme and to a great extent enabled the rural economy to grow at a faster pace. Given the
volume of transaction and number of beneficiaries, linking cashless instruments (through
specific cards issued by the bank) will have a significant impact on enabling cashless
transaction in rural parts. However, the initiative would require that the government invests in
POS at various outlets in rural India which will accept these payments. Inducing MNREGS
beneficiaries to undertake cashless transactions would immediately mean that around 52
million households from rural India will be part of the cashless network. A modest amount
(10%) spent on cashless expenditure from the MNREGS payment would immediately mean
that close to INR 3000 Crores will be the additional cashless transaction leading to an annual
savings of INR 25 Crores on printing and managing currency.

The role of the Government towards promoting cashless is briefly summarized below

Government has two roles. One, that of directly promoting cashless in the sectors it is
present and two, through policy initiatives that will create the necessary platforms

33 http://biz.zeenews.com/news/news_content.aspx?newscatid=1&newsid=11823
31

A micropayment structure based on UID will attain financial inclusion as well as


cashless economy.

Government departments should be able to disburse benefits by simply generating a


list that contains a UID in one column and making payments against it.

It can mandate payment through non cash means for many of the sectors where it is
the sole recipient. For example, taxes, passport fees, collection of fees etc.

Payments based on UID can be made for MNREGS.

It can also mandate payments through cashless for households availing PDS or other
government programs

As a policy maker, its main job is to ensure the network size. One way to do that
would be to lower/remove all transactions costs (MDR and other fees) involved with
cashless

Another initiative would be to announce tax incentives to households who manage to


make payments to some unorganized sector through cashless (e.g., domestic servants,
cooks, sweepers, drivers, plumbers etc). Appropriate tax benefits (say a deduction of
taxable income with a ceiling) given to amounts paid by cheque

6. Roadmap for Cashless: Instruments and Recommendations


The findings can now be put together to identify the roadmap for moving towards a cashless
economy. For this two things are important. Designing of appropriate instruments are
necessary which is in sync with Indias current path of development and her strengths.
Further, a detailed policy initiative that sets the targets and then outlines the steps to get there
are necessary too. We address these issues now.
6.1: Instruments that will promote cashless

32

There are some existing models of cashless transactions that are practised in India with
particular emphasis on financial inclusion. They are based mostly on the mobile phone
technology. Given the increasing penetration of mobile phones -a teledensity of almost 70
(154 for urban and 33 for rural) it is natural to base financial inclusion strategies on mobile
phones.34 It is further expected that given the current growth rate, by 2014, the teledensity
will reach 97%.
The technology involves the concept of a mobile wallet. Mobile wallet is a mobile enabled
application and payment service provider which enables its network of users/subscribers to
make convenient payments to any designated affiliates or the mobile wallets appointed
network of merchants to accept mobile wallet points as mobile based payment gateway.
Among the many financial inclusion initiatives through mobile phones, OxiCash is a first of
its kind, prepaid service in India. It is a virtual prepaid card attached to a mobile number
that can be used to deliver a host of services, like prepaid mobile
recharges, bill payments, travel, online games and other utilities. It works
like a mobile wallet. For a majority of consumers not having net access,
OxiCash enables service delivery through mobile phone using GPRS/SMS.
For loading from retail, the OxiCash distributor deposits money in Oxigens
bank account through Cash/Cheque/DD/EFT (for details see,
Gangopadhyay, 2009).
Another initiative through mobile technology is the The State Bank of India-Eko
initiative. The intervention is a bank-led model of financial inclusion. The distributors,
retailers, business correspondent (Eko Financial Services Private Limited) and the bank (SBI)
form the chain in the ecosystem to ultimately reach the customer. The intervention targets
areas with migrant population, having a mobile phone but no bank account. The customer can
go to the nearest retailer for opening a bank account. The retailer, identified by Eko, opens an
account for the customer using a mobile phone, once the customer has submitted the
necessary documents. A bank account is opened depending on the kind of remittance
structure the customers opt for (person-to-person where both the migrants and family member
need to have an account, remote deposit where the recipient needs to have an account, and
34 http://www.trai.gov.in/WriteReadData/trai/upload/PressReleases/816/Press_release_feb
%20-11.pdf
33

remote withdrawal, where the sender needs to have an account). While both the models have
the necessary factors to impact financial inclusion, they may not be the most appropriate
instruments to promote cashless transactions across the varying needs of rural population.

To evaluate the possible instruments that can promote cashless transaction it is important to
identify the main advantages cash brings in any transaction. It is straightforward to argue that,
any cashless instrument that mimics these advantages is likely to be more readily adoptable
than those which do not have these advantages. The four prominent advantages cash brings
are (a) ready acceptability by all (b) no extra (financial) charges involved in using cash
transactions (c) anonymity of the user, and (d) financial liability is capped at the amount of
cash that is used. The first two are self explanatory. Cash is readily acceptable to all it is a
promissory note and one cannot refuse to accept cash as a medium of exchange legally.
Further, cash being the most liquid asset, attracts no extra charges for usage in terms of
annual fees, processing fees, transaction fees etc. The third advantage of cash is also
extremely important and one that is often ignored-anonymity of the parties involved in cash
transaction. In other words, if a consumer were to make payments through cash, the identity
of the consumer is not revealed or often cannot be traced. Finally, the maximum loss a user
of cash can suffer is the cash amount itself. Since usage of cash cannot be traced to any other
financial details about the user, the liability of using cash is limited to the cash amount itself.
Apart from these listed advantages, Cash, unlike anything else of value, cannot be designated
as belonging to a particular person, and hence the holder has to be extra careful in not being
dispossessed of it. Once dispossessed of cash, it cannot be retrieved to the rightful owner
without strong circumstantial evidence. A technology enabled purse, on the other hand, could
only be operated by the possessor, through a PIN or code.
Based on the advantages listed above, the most obvious instrument of cashless transaction
should be one that is easily acceptable to most (it is here the policy initiative about enabling
who all can issue and accept cashless transactions become important), costs equal if not less
(this is where targeted discounts or incentives to parties using cashless instruments become
important) and should not reveal the identity of the user (this is where mobile phone based
technologies may not succeed initially) and details about other financial information about
the user is not revealed (this often deters users from using on line financial instruments or

34

certain debit or credit cards). In table 6.1, we evaluate some of the alternate non cash
instruments.
Note if one were to increase the acceptability of various non cash instruments to as many
agents as possible (by incentivizing various agents), the instrument that comes closest to cash
are the pre paid cards. Therefore, as a starting point, the instrument that can initially replace
cash seems to be pre paid cards (part of the closed and semi closed payment system). These
are payment instruments which are redeemable at a group of clearly identified merchant
locations/ establishments which contract specifically with the issuer to accept the payment
instruments. These instruments do not permit cash withdrawal or redemption by the holder.35
The open system cards (through which money can be withdrawn) do not increase non cash
payments much as ATM cards only help in withdrawing and circulating currencies. As
prescribed by RBI, the maximum value of any pre-paid payment instrument has been fixed at
Rs 50,000. Once a group of merchants are involved in the network who would accept such
pre paid instruments, these cards will have ready acceptability.

The exact technology involving these pre- paid cards can be either of the two types
(a) PIN or signature based transaction, or (b) transaction that does not require authentication.
While the former type makes the transaction or usage more secure, cards of type (b) are
closer to money given the anonymity of the transaction initiator. Further, cards of type (b) can
be made contactless to further lower the transaction cost. Contactless payments are simply
payment transactions that require no physical contact between the consumer payment device
and the physical point of sale (POS) terminal. The consumer holds the contactless card or
device in close proximity (less than 2 to 4 inches) to the merchant POS terminal and the
payment account information is communicated via wireless network.36These cards do not
require PIN. Contactless payment has progressed reasonably quickly since the emergence of
the first products in the USA in 2004. Datamonitor estimated 80 million contactless devices
35 The guidelines about who can issue these cards and what these cards entail can be found at
Payment and Settlement Systems Act, Board for Regulation and Supervision of Payments and
Settlement Systems Regulations, 2008 and the Payment and Settlement Systems Regulations,
2008 of RBI at http://www.rbi.org.in
36 Certainly cards like this would have come very useful to reduce waiting and processing
time in the recent traffic snarl at Gurgaon.
35

globally at the end of 2008. Today, it values the global contactless market at potential value
of $963 billion a year. Visa Europe is spending around Euro10 million helping retailers to
adopt the new technology with the vast majority of contactless devices distributed across the
UK, Italy and Turkey, while pilot projects are in progress in France, Germany, Poland, Spain
and Switzerland.

As of 2009-10, there are around 19 million credit cards and 190 million debit card holders
and there are just 11 transactions per credit card and one transaction per debit card annually.
The average amount transacted per credit card stand at Rs 337, while the average amount per
transaction is Rs 25. The corresponding figures for debit cards stand at Rs 15 and 16
respectively. Besides, India had about 0.5 million point-of-sale (POS) terminals in 2009-10
and on an average, there was less than one debit card transaction and only 1.3 credit card
transactions per day per POS terminal. Thus, both from the merchants' and customers' point
of view, POS terminals are highly under-utilised.37 Among all cashless retail electronic
payment systems, 27% are in ECS (Electronic Clearing system), 60% are through NEFT
(National Electronics Funds Transfer), 10% are through credit cards and a mere 4% are
through debit cards (RBI).

It is clear that pre-paid cards can mimic currency the closest. However, for individuals to
switch to such cards, it is important that there are substantial benefits now (and not mere
perceived benefits due to occur in the future). One obvious way to make such cards more
attractive is to offer some discount on the MRPs of goods and services purchased using such
cards. Another possible mechanism is to make merchants accepting these cards, given terms
of lower MDR (Merchant Discount Rate) or even doing away with the cost entirely.38
However, this is not an initiative that will come from either the seller or the producer. It is
here where the Government has to step in. The compensation to the seller or the manufacturer
can be in the form of tax breaks or direct reimbursements. Note, this is required only at the
initial level to develop the network size. Once the comfort level of using such readily
acceptable and secured financial instrument rises, increasing the size of the network
37 See Das and Aggarwal (2010) and http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?
Id=12106
38 Das et al suggests a meager 0.2% MDR for debit cards.
36

becomes easier. Note that, our household survey reveals that 11% of all responses for not
using cashless instruments is that they are perceived by the households to be insecure. The
exact discounts can be calculated from the savings and other benefits non cash instruments
bring. We discuss some of those issues in the next section.

6.2. Roadmap ahead: Recommendations

The path to cashless has three important and basic (MIN, henceforth) components
mandatory, incentives and networks. The role of the Government is prominent in all the three
cases. It can make certain nature of payments to be made by cashless instruments mandatory.
These can be easily achieved for instruments that involves paying directly to the Government
for certain goods and services (say Passport fees, tax payment, payment to railways, PDS,
State electricity Boards or to National airlines etc) or where the Government pays (salaries,
various schemes like MNREGS, other cash transfer schemes). However, given that enforcing
such mandatory requirements are difficult for transactions that involve two private parties
(say household and retailers), an incentive scheme will work better. These incentives need to
be given to one party to carry the cashless transactions. Finally, for a cashless system to be a
long run equilibrium, a critical size of the network must be developed. The role of the
Government along with RBI is most crucial here. We summarize below, the current status and
the possible interventions for each retail consumption sector towards moving cashless. In
table 7.2 we present the roadmap for households while in table 7.3 we present the roadmap
involving the enterprises. It is important to note that the bottlenecks identified so far has two
prominent things. One is the lack of acceptability and the other is high transaction costs.
Therefore, our recommendations must keep these two facets and should be consistent in
removing at least one constraint for each consumption sector. However, it is worthwhile to
note that, even if these two constraints were to be removed, cashless transactions will not be
automatic. For example, let us construct an extreme scenario. Say, in city X, the Government
decides to incentivize a group of retail outlets to accept cashless payments as well as removes
all transaction costs. Even in this scenario, cashless transactions may not readily pick up as
37

individuals may not want to keep financial footprints of their transactions if done cashless.
This is primarily because, some amount of tax avoidance is possible if the transaction has no
footprints. Therefore, apart from ensuring acceptability and low cost, it is vital that the need
to address the issue of financial footprints is taken. Our recommendations are in sync with
these observations.

The framework for recommendation must eventually address the 5 As of promoting financial
inclusion through cashless payment instruments.39 These are availability, accessibility,
acceptability, affordability and awareness.
Availability combines the notion of a level playing field for the service providers along with
the availability of choice of products for the consumers.
Accessibility as a concept should be the cornerstone to expand the reach of the banking
systems and the various payment products to all the sections of the society including the aam
aadmi as part of the financial inclusion plan and efforts.
Acceptability is the thought process which enables both the households as well as the
enterprises to embrace the newer products and technology.
Affordability is a key corner stone which should guide the product offering as being value for
money for the households and enterprises with technology. To ensure this, atleast at the initial
stages various discounts have to be in place. and innovation being the important drivers for
providing cost effective and quality services by the service providers.
Awareness- Creating awareness through financial literacy campaigns is necessary to increase
the volumes in the payments business.

6.3. Instititutions: Role of MFIs in Financial Inclusion through Cashless

39 http://www.indiainfoline.com/Markets/News/Well-functioning-payment-systemeliminates-systemic-risks-RBI/5230359134
38

While access to banks are of a concern to the urban population, the magnitude of the problem
fades in comparison to rural India. There are 60,000 villages with a population exceeding
2000 that have no banking facilities. Despite the network of 82,000 bank branches of
commercial banks across the country, Indias banks cater to only about 5% of the villages.
There are about 6.3 bank branches for every 100,000 people in India. In terms of
geographical accessibility there are, on the average, less than 3 branches per 100 square
kilometres. For rural India, the numbers are 3.5 branches per 100,000 people and less than 1
branch per 100 square kilometres of land area. These numbers alone are sufficient to infer
that the simple task of accessing the nearest bank branch is often the most severe challenge.
Therefore, the necessary condition for cashless-households being financially included, is not
met in rural parts. The natural question therefore is to ask, which institutions can play the
most prominent role here?
In India, MFIs have a widespread reach. There are more than 74 million MFI clients (IDF
2011a). Around 54 million of these clients are served by NGO-SHGs that are linked to banks.
The remaining clients are served by various organization and lending types. While the
growth outreach of the NGO-SHG programme in 2009-10 was 8.5%, the growth outreach of
other MFIs during this period was 18%. Given the MFI reach (and particularly in rural India
as 80% of MFI clientele is in rural India), it is natural to look at the role of MFIs for the half
that is financially included. In particular, we are interested in the question: What has been the
role of the MFI in promoting financial inclusion among the population who do not have any
access to formal financing? These questions are particularly important given that (a) MFIs
have a widespread network where they target a significant poor population; (b) they are often
in direct competition to banking. Afterall, MFIs, who lend at an effective interest rate
exceeding 36% (Malegam 2011) to clients would lose these clients if bank finance at much
lower rates were available to these people. Therefore, what is the incentive for MFIs in the
current scheme of things to make it easier for its clients to access much lower bank finance?
Naturally, the moot point is how does MFIs, if at all, fits in into the overall scheme of
financial inclusion? More specifically, how does one incentivize MFIs to promote financial
inclusion?
MFIs with their reach among the rural areas often assume the role of financers of an entire
community. For example, considering our example of the typical village, while X is a MFI
client, in all likelihood Y and Z are also MFI clients (often the same MFI). MFIs apart from
39

disbursing the loans play another important role-that of creating awareness and promoting
financial literacy. Financial literacy through prudent financial decision making is essential for
MFIs to impart to its clients to maintain the high repayment rates. Therefore, MFIs have
some natural advantages which can be exploited and therefore entrust them in creating and
maintaining this network. As argued earlier, some of the major advantages that MFIs have
over other institutions are:
(a) their spread and access to households below poverty line (especially in rural parts)
(b) their access to the financially excluded population
(c) being the nodal point of financial transactions in village communities;
(d) their ability to generate financial awareness among the community.
Therefore, MFIs if involved in promoting a cashless economy, will be most efficient? The
question therefore is why will they do it? This takes us directly to the issue of conflict in
interest between MFIs and financial inclusion. As stated earlier, MFIs are often in direct
competition to banking. Afterall, MFIs, who lend at an effective interest rate exceeding 36%
(Malegam 2011) to clients would lose these clients if bank finance at much lower rates were
available to these people.40 Therefore, what is the incentive for MFIs in the current scheme of
things to make it easier for its clients to access much lower bank finance? Any system that
fails to answer this simple question cannot rely MFIs to attain financial inclusion.
Our solution is simple. By allowing MFIs to develop and maintain the critical network of
cashless transactions, the incentive for the MFIs to promote cashless is developed. Simply
put, if a MFI were to get a certain proportion (say 0.5%) of all cashless transactions as
incentives it would be the appropriate incentive. The numbers would be staggering. Even if
the MFIs are able to convert a mere 5% grocery transactions into cashless transactions, Given
that groceries form 60% of rural household budget, this would mean a 0.15% commission on
total rural household expenditure involving over 400 million households! Clearly, if one were
to add the direct costs of going cashless, one finds a huge space to structure these incentive
figures appropriately. Therefore, the incentive will be now for the MFIs to ensure that both
households (X) as well as store owners (Z) transact in cashless instruments. Note that, given
that cashless transactions will leave digital footprints, misreporting of cashless transactions
40 Malegam (2011), Report of the Sub-Committee of the Central Board of Directors of Reserve Bank of
India to Study Issues and Concerns in the MFI Sector, available at www.rbi.org.in

40

will be entirely avoided. The stumbling blocks can now be avoided as the MFI will dissipate
the advantages off gong cashless to both parties. Note that, given the size of the market,
competition among MFIs would soon follow. This would mean that the eventual share will
reduce. However, the network would develop by then ensuring that exogenous incentives are
no longer need to sustain cashless transactions.41
In other words, there is a perfect platform for MFIs to promote financial inclusion if one
identifies the correct instrument, the process and then see how MFIs fit in.

8. Conclusion
The need to move towards a cashless economy in India is immense. One, it will save a huge
amount of money that is spend annually in printing and maintaining currency. Most
importantly it will help the Government achieve its objective of inclusive growth (through
financial inclusion) and make public utilities more efficient. Currently less than 1% of all
consumption expenditure is incurred through cashless instruments. However, to move
towards a cashless economy, the important role of network effect and creation of a critical
mass cannot be ignored. Therefore, at least in the initial stages, steps have to be taken to help
build the critical network size. The current draft indicates some of those steps.
We identify a MIN programme for the road to cashless. The key features of the MIN program
revolve around two major components- mandatory schemes and incentivized schemes.
Mandatory schemes will have to have the direct involvement of the Government while
incentivized schemes can be between any two private parties as long as one of the parties
have been incentivized to use cashless. We further recommend certain tax incentives for
certain specific household expenditures. It is not mere coincidence that while around 3.5% of
the households use non cash instruments, the percentage of taxpaying population is also
3.5%! The specific sectors can depend upon the objectives of the Government (financial
inclusion etc). The exact amount of incentives etc can be back calculated by outweighing the
(expected) loss in tax revenue and the gains from cashless transactions and financial

41 Bappaditya Mukhopadhyay and Sambit Rath (2011), Role of MFIs in Financial


Inclusion Review of market Integration.
41

inclusion. Finally, apart from the incentives, a concerted effort to increase the network size is
needed.
For rural India, we recommend a prominent role or MFIs in promoting cashless payments.
This is easily attainable if one were to leverage the specific advantages MFIs have and
incentivize them for creating and maintaining a cashless network.

42

Appendix
Table 1: Card Contributions of various countries
Card to Consumption(%)

Argentina
Australia
Austria
Belgium
Brazil
Canada
Chile
China
Colombia
Czech
Denmark
Egypt
Finland
France
Germany
Greece
Hong
Hungary
India
Indonesia
Ireland
Italy
Japan
Kuwait
Malaysia
Mexico
Netherlands
New Zealand
Norway
Peru
Philippines
Poland
Portugal
Puerto
Russia
Saudi Arabia
Serbia
Singapore
South Africa
South Korea
Spain
Sweden

2007
1.66
2.91
0.37
0.12
3.22
1.71
1.35
4.48
0.96
1.4
2.25
0.16
0.82
0.91
0.41
0.31
1.15
0.87
0.61
0.54
0.48
0.17
0.44
2.17
0.61
0.93
1.02
1
4.04
0.83
2.29
1.5
1.8
0.37
1.02
0.42
1.45
1.52
0.77
1.77
0.97
1.41

2008
2.2
3.11
0.45
0.21
4.24
2.06
2.04
5.61
1.08
1.99
2.77
0.24
0.9
1.13
0.53
0.39
1.39
0.99
0.94
0.65
0.63
0.38
0.56
2.58
0.87
1.23
1.19
1.21
4.58
1.22
2.56
1.85
2.15
0.44
1.25
0.57
1.46
1.89
1
2.07
1.28
1.83

Ranks
( 2008)
9
4
46
52
3
12
13
1
31
14
6
51
37
30
45
48
21
34
35
40
41
49
44
7
38
26
29
28
2
27
8
17
10
47
25
43
20
16
33
11
23
18

2007
1.01
1.67
0.2
0.06
1.97
0.97
0.82
1.7
0.62
0.67
1.1
0.11
0.42
0.51
0.23
0.21
0.68
0.56
0.34
0.34
0.23
0.1
0.25
1.2
0.29
0.62
0.47
0.6
1.82
0.54
1.57
0.91
1.13
0.26
0.55
0.19
1
0.58
0.95
0.5
0.56
0.67

Card to GDP%
Ranks
( 2008)

2008
1.34
1.78
0.25
0.11
2.61
1.2
1.25
2.11
0.7
0.95
1.37
0.16
0.46
0.63
0.3
0.27
0.81
0.64
0.5
0.4
0.31
0.22
0.32
1.51
0.42
0.82
0.55
0.73
2.05
0.79
1.77
1.13
1.38
0.31
0.71
0.26
1.01
0.73
1.09
0.65
0.73
0.88

10
4
49
52
1
12
11
2
30
18
9
51
37
33
45
46
22
32
36
41
43
50
42
7
40
21
34
26
3
23
5
13
8
43
29
47
16
26
14
31
26
19
43

Switzerland
Taiwan
Thailand
Turkey
UAE
U.K.
Ukraine
U.S.
Venezuela
Vietnam
All
Developed
Emerging

0.83
0.67
1.71
0.86
0.85
1.41
0.47
0.8
2.78
0.27
1.08
0.3
0.78

0.94
0.77
1.93
1.28
1.29
1.5
0.6
1.08
3.1
0.37
1.38
0.37
1.01

Table 2.1: Currency in Circulation


Year
Currency in
Cash on
Circulation
Hand
with
banks
2008-2009
2009-2010
2010-2011

6,81,099
7,88,279
9,36,935

0.49
0.39
0.93
0.59
0.91
0.56
0.51
0.32
1.52
0.17
0.64
0.18
0.46

35
39
15
23
22
19
42
31
5
50

25,703
32,056
35,351

0.55
0.44
1.05
0.86
0.98
0.76
0.78
0.44
1.74
0.26
0.82
0.22
0.6

34
38
15
20
17
25
24
38
6
47

Currency
with Public

6,65,450
7,67,492
9,14,170

Table 2.2: Retail Electronic Payment Systems Transactions Numbers (Lakhs)

Year
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

Total
Electronic ECS
ECS
Credit
Debit
Payments (Credit) (Debit)
NEFT
Card
Card
1,669
203
79
8
1,002
378
2,289
401
153
25
1,295
415
2,850
442
360
31
1,561
457
3,787
690
752
48
1,695
602
5,353
784
1,271
133
2,282
883
6,678
884
1,601
322
2,596
1,277
7,182
981
1,493
663
2,342
1,702
9,086
1,173
1,567
1,323
2,651
2,371

Table 2.3: Retail Electronic Payment Systems Amount (INR Crores)

Year
2003-04
2004-05

Total
Electronic ECS
ECS
Credit
Debit
Payments (Credit) (Debit)
NEFT
Card
Card
52,143
10,228
2,254
17,125 17,663
4,874
1,08,750
20,180
2,921
54,601 25,686
5,361
44

2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

1,46,383
2,35,693
10,41,992
5,00,322
6,84,886
13,08,687

32,324
83,273
7,82,222
97,487
1,17,613
1,81,686

12,987
25,441
48,937
66,976
69,524
73,646

61,288
77,446
1,40,326
2,51,956
4,09,507
9,39,149

33,886
41,361
57,985
65,356
61,824
75,516

5,897
8,172
12,521
18,547
26,418
38,691

Table 2.4: Retail Electronic Payment Systems: Amount per transaction (INR)

Year
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

Total
Electronic ECS
ECS
Credit
Debit
Payments (Credit) (Debit)
NEFT
Card
Card
3,123
5,035
2,862 2,09,094
1,763
1,291
4,751
5,039
1,909 2,14,207
1,984
1,291
5,136
7,311
3,612 1,99,831
2,171
1,291
6,224
12,065
3,383 1,62,157
2,440
1,358
19,465
99,818
3,850 1,05,390
2,541
1,418
7,492
11,029
4,185
78,342
2,518
1,453
9,537
11,985
4,657
61,730
2,639
1,552
14,403
15,489
4,699
70,963
2,848
1,632

45

Table 2.5: Spread of ATMs


Branches
Bank type

Rural
Semi- urban
Urban
Metropolitan
Total
On-site
Off-site
Total
Per cent of Off-site to total ATMs
ATMs per branch

ATMs

Scheduled
Public
Private
Commercial Sector
Sector
Foreign
Banks
Banks
Banks
Banks
20773
19567
1201
5
17638
14595
3037
6
16007
12920
3027
60
14742
11743
2762
237
69160
58825
10027
308
32679
23797
8603
279
27474
16883
9844
747
60153
40680
18447
1026
45.7
41.5
53.4
72.8
0.87
0.69
1.84
3.33

46

Table 2.6: Top 50 cities with Banking potentials


Centre Name
Deposit Deposit Credit
Amount
Amount
(INR
growth (INR
Crores)
Crores)
(%)
Greater Mumbai
Delhi
Bangalore
Chennai
Kolkata
Hyderabad
Ahmadabad
Pune
Jaipur
Lucknow
Chandigarh
Kochi
Vadodara
Ludhiana
Coimbatore
Bhubaneswar
Gurgaon
Noida
Bhopal
Indore
Nagpur
Patna
Kanpur
Thiruvananthapura
m
Surat
Visakhapatnam
Guwahati
Raipur
Panchkula Urban
Dehradun
Jalandhar
Navi Mumbai
Ghaziabad
Patiala

Credit
growth
(%)

10,07,71
2
5,97,101

18

938300

23.4

11.9

501279

37.6

2,05,437
1,42,967
1,56,974
1,12,541
67,874
66,724
32,518
52,950
32,571
26,085
27,213
17,380
18,246
27,337
30,881
30,582
28,607
19,256
24,182
31,537
24,868
19,807

20.6
15.3
11.1
21.7
27
16.9
26.3
20.5
16.8
20.1
20.8
15.5
23.1
30.8
29.5
26.1
38.4
18.5
27
30.8
31.4
14.2

158956
200129
147783
151834
65281
52104
52602
29562
48102
28520
24934
31858
28718
19520
14062
13289
15195
23633
16568
7338
9597
13152

16,908
15,812
20,644
13,936
12,741
19,090
15,828
16,090
13,201
6,936

21.3
33.4
24.2
32.8
53.8
2.3
13.1
40.8
16.2
11.3

14456
12809
7899
13100
11303
3769
6737
5342
7405
13175

Total
Volume
(INR
Crores)

CAGR

21

19.2
23.8
27
30.4
30.5
26.3
36.1
60.2
18.5
51.1
30.5
31.2
19.4
45.3
63
41.8
43.6
40.5
38.8
35.1
20.9
32.7

19,46,01
2
10,98,38
0
3,64,393
3,43,096
3,04,757
2,64,375
1,33,155
1,18,828
85,120
82,512
80,673
54,605
52,147
49,238
46,964
46,857
44,943
43,871
43,802
42,889
40,750
38,875
34,465
32,959

32.5
51.9
30.7
35.4
31
23.8
20
42.4
13.9
30.8

31,364
28,621
28,543
27,036
24,044
22,859
22,565
21,432
20,606
20,111

26
42
26
34
43
6
15
41
15
24

24
20
20
19
27
29
21
32
35
18
36
25
26
21
37
40
31
40
31
32
32
28
22

47

Thane
Faridabad
Rajkot
Amritsar
Ranchi
Mangalore
Agra
Madurai
Varanasi
Srinagar
Tiruppur
Mysore
Vijayawada
Bidhan Nagar
Allahabad
Jamshedpur
ALL INDIA

13,575
12,612
10,147
12,201
13,221
11,559
11,202
8,432
12,248
9,343
3,913
9,520
7,234
11,076
11,093
7,984
49,54,72
7

19.4
16.2
17.5
26
19.5
19.6
27.6
14.6
24.3
31.1
21.2
16.3
17
20.1
20.6
11.8
18.1

6211
7161
8032
5796
4603
5689
5436
7507
3550
6433
11662
5924
7795
2815
2445
5147
37,78,51
2

49
27.5
41.4
23.3
31.4
19.5
25.3
19
35.5
4.2
19.3
23.9
21
47.4
15.7
17.4
26.6

19,786
19,773
18,179
17,997
17,824
17,248
16,638
15,939
15,798
15,776
15,575
15,444
15,029
13,891
13,538
13,131
87,33,23
9

29
20
28
25
23
20
27
17
27
20
20
19
19
26
20
14
22

48

Table 2.7: Estimated retail sector for 2010-2011


Estimates for 2010-11

Consumption Sectors
Food & Grocery
Beverages
Clothing and Footwear
Furniture, furnishing appliances
Non Institutional healthcare
Sports goods, entertainment,
equipments and books
Personal care
Jewellery, watches etc
All India
All amounts are in Rs billion.

Amount
of
Retail
13576
753
2026
1486
1987

Amount
of
Organized
retail
75.34
39.09
438.04
194.50
29.28

OR as a
share
(%) of
retail
0.55
5.19
21.62
13.09
1.47

Share of
sectors
(%) in
retail
54.26
3.01
8.10
5.94
7.94

Share of
sectors
(%) in
OR
7.33
3.80
42.60
18.92
2.85

995
1851
2347
25022

117.38
54.88
79.69
1028

11.79
2.96
3.40
4.11

3.98
7.40
9.38
100.00

11.42
5.34
7.75
100.00

49

Table 3.1: Urban SEC


Occupation
Illiterat
e

Less
than 4
yrs in
school

5-9
yrs of
school

Education
School
Some
certificat
college
e

Graduat
e

Postgraduate

Skilled

E2

E1

B2

B2

Unskilled

E2

E2

E1

Shop owner

B2

B2

A2

A2

Petty trader
Employer of above 10 persons

E2

B2

B2

B1

B1

A2

A2

A1

A1

A1

Employer of below10 persons

B2

B2

B1

A2

A1

A1

Employer of none

B2

B1

A2

A1

A1

Clerk

B2

B1

B1

Supervisor

B2

B1

A2

Professional

B2

B1

A2

A1

Senior executive

B1

B1

B1

B1

A2

A1

A1

Junior executive

B2

B1

A2

A2

Table 3.2: Rural SEC


Education level

Type of house
Pucca

Semipucca

Kuchcha

Professional degree

R1

R2

R3

Graduation/ PG

R1

R2

R3

College

R1

R2

R3

SSC/HSC

R2

R3

R3

Class 4-Class 9

R3

R3

R4

Up to class 4

R3

R3

R4

Self-learning

R3

R4

R4

Illiterate

R4

R4

R4

50

Table 3.3: Sample size per cell

SEC A1
SEC A2
SEC B1
SEC B2
SEC C
SEC R1
Total

Delh
i
30
70
80
30
98
0
308

Kolkata
30
71
46
57
101
0
305

Mumbai
52
40
59
47
103
0
301

Bangalore
37
63
47
55
100
0
302

Kanpur
25
75
42
59
99
150
450

Jaipur
42
52
55
57
94
149
449

Surat
22
82
43
76
126
146
495

Vizag
26
70
51
54
99
151
451

51

Table 3.3: Percentage of households who incur non cash expenditures

Item
Cereals
Milk and Milk Products
Edible oils
Eggs, Fish and Meat
Vegetables and Fruits
Sugar and Salt
Beverages and Refreshments
Pan, Tobacco and Intoxicants
Processed Foods
Electricity
LPG and Other Fuels
Entertainment and Related Expenses
Other Consumer Services (not conveyance)
Domestic Servant, Cook and Sweeper
Barber, Beautician, Tailor
Telephone and Mobile Charges
Conveyance
Rent
Durable Goods
Clothing and Footwear
Education
Medical, Institutional
Medical, Non-institutional
Personal care, Toiletries and Sundry
Rail and Air Travel
Total

Percentag
e
(househol Percentage
Percentage
ds) All
(households) (households)
India
Urban
Rural
0.77
1.26
0.54
0.31
0.65
0.15
0.42
0.99
0.15
0.6
1.22
0.21
0.19
0.6
0
0.31
0.81
0.08
0.36
0.78
0.14
0.41
0.24
0.51
0.21
0.59
0
0.77
1.98
0.21
0.41
1.27
0
0.5
1.1
0.16
0.58
1.2
0.22
0.41
0.65
0
0.27
0.64
0.09
0.67
1.55
0.25
0.59
1.48
0.22
1.27
3.13
0
2
4.23
0.95
1.74
3.52
0.94
1.86
3.13
1.27
0.96
1.55
0.65
0.56
1
0.32
0.74
1.54
0.37
0.92
1.11
0.81
6.92
12.34
4.44

*The percentages for the top ten consumption items are boldfaced.

52

Table 3.5: Proportion of non-cash expenditure (by item)

Item
Cereals
Milk and Milk Products
Edible oils
Eggs, Fish and Meat
Vegetables and Fruits
Sugar and Salt
Beverages and Refreshments
Pan, Tobacco and Intoxicants
Processed Foods
Electricity
LPG and Other Fuels
Entertainment and Related Expenses
Other Consumer Services (not conveyance)
Domestic Servant, Cook and Sweeper
Barber, Beautician, Tailor
Telephone and Mobile Charges
Conveyance
Rent
Durable Goods
Clothing and Footwear
Education
Medical, Institutional
Medical, Non-institutional
Personal care, Toiletries and Sundry
Rail and Air Travel
Total

Percenta
ge
(househo
lds) All
India
1.62
0.25
0.49
0.6
0.34
0.57
3.55
0.36
0.68
1.6
0.82
1.59
1.34
1.62
0.49
2.24
2.13
4.33
2.64
2.36
1.67
0.77
1.27
1.57
1.87
1.38

Percentage
Percentage
(expenditure (expenditure)
) Urban
Rural
2.48
1.1
0.68
0.07
1.47
0.05
1.13
0.13
1
0
1.56
0.11
7.14
0.88
0.28
0.42
1.48
0
3.27
0.5
2.18
0
3.46
0.45
2.21
0.85
2.55
0
1.49
0.03
3.63
1.47
5.78
0.72
9.81
0
5.25
1.16
5.11
0.96
3.07
1.03
1.03
0.67
1.82
1.02
4.32
0.55
2.81
1.17
2.92
0.55

* The percentages for the top ten consumption items in are boldfaced.

53

Table 3.4: Reasons for not using cashless payments (in percentages)

Items
Cereals & cereal products, pulses & their products
& spices
Milk & milk products
Edible oil
Egg, fish and meat
Vegetables & fruits
Sugar & salt
Beverages & refreshments
Pan, tobacco and intoxicant
Processed food
Electricity
LPG and other Fuels
Entertainment & related expenditure
Other consumer services excl. Conveyance
Domestic servant/cook & Sweeper
Barber, beautician, tailor etc
Telephone/mobile charges
Conveyance
Rent
Durable goods
Clothing & footwear
Education
Medical institutional
Medical (non-institutional)
Personal care, toilet and sundry articles
Conveyance-Air fare &Railways
Averages

Not
accept
47.98
46.16
43.63
49.45
45.65
41.52
40.97
38.25
34.9
30.96
36.02
37.68
41.65
47.04
43.08
36.7
41.38
45
29.63
28.52
31.24
27.95
30.25
38.07
29.38
38.52

Small
13.11
19.47
21.31
18.65
18.52
24.15
24.65
22.17
26.85
27.17
25.32
24.59
18.71
16.54
23.58
24.47
21.87
19.02
14.35
15.46
14.75
16.1
23.19
21.15
20.53
20.87

Extra
charges
6.15
5.22
6.47
6.32
6.25
5.68
6.41
6.8
8.22
8.69
8.64
7.31
8.05
7.37
6.24
7.65
7.02
6.95
13.89
13.56
12.88
15.83
10.33
8.83
10.21
8.44

Security
9.75
8.12
6.81
8.71
7.71
7.15
7.62
11.84
10.76
10.31
7.66
8.91
10.4
12.74
7.03
9.06
8.78
12.32
20.83
18.4
16.58
12.98
15.5
10.89
16.34
11.09

Not
aware
14.4
13.38
13.99
14.79
14.09
14.11
14.22
14.49
14.41
14.77
14.72
16.17
16.57
11.63
13.37
14.16
14.49
13.05
13.89
15.82
16.58
19.82
15.56
14.42
19.12
14.63

54

Table 6.1: Payment instruments


Cash

Credit/debit

Pre paid card

Mobile wallet

Acceptability
Financial cost

High
Zero

card
Moderate
High

Low
Low

Low
Moderate

of usage
Storage cost
Security of

High
Low

Low
High

Low
Low

Low
High

transaction
Anonymity
Financial

High
Low

Low
High

High
Low

Low
Moderate

liability

55

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