One of the objectives of central banks is to move people away from holding cash to the plastic or virtual world where it becomes easy to monitor the source of transaction. To this extent, governments are first trying to link all high-value transactions with the identity of the person while banks are working towards migrating customers from the branches and ATMs. How far has this succeeded?
Three trends can be examined closely here. The first is the proportion of currency in money supply. This gives an idea of the amount of cash that the system holds for purposes of liquidity, transactions and precaution. The table shows that the share of cash has been stable between 13% and 14% in the last five years, which is the period when the banking system has given specific thrust to alternative forms of holding money.
Households prefer to hold a fixed proportion of cash for several reasons. First, the precautionary motive is dominant for emergencies, especially in non-metro cities. Second, cash is used for several land transactions as well as purchase of gold to avoid the identity being revealed. Third, there are a large number of small-value transactions in mom & pop stores as well as travel where cash has to be used. Therefore, cash is still very important and has not ebbed in importance.
The second trend pertains to the use of debit cards. Banks are issuing debit cards to all account holders and often charging for the same. They are used for purchases as well as for withdrawing money.
Between 2011-12 and 2015-16, the number of cards in circulation increased 2.4 times to around 660 million, which is impressive. However, the average number of transactions per card has come down from 19.44 to 13.97, which is quite revealing. The average value of transaction was Rs 2,914 in 2015-16 and had increased gradually from Rs 2,684 in 2011-12, with the value being in the range of Rs 2,900-3,000 in the intervening years.
Third, the number of credit cards in circulation increased from 17.64 million to 24.50 million during this period. This has largely been due to the issuance of cards free of cost and fees being waived off in the first year. In terms of usage, the average number of transactions is better than that of debit cards increasing from 18.15 to 32.31. This can be attributed to the relatively more affluent public using these cards to a greater extent. As the lower income group subscribers realise that the interest rate charged is 24-30%, with recurring fees being the icing, they tend to stop using them. Curiously, during this period, the outstanding credit on account of credit cards for banks has increased from Rs 2,345 crore to Rs 3,444 crore. Again, in terms of value of transaction, the numbers are better than that of debit cards at Rs 3,078 (Rs 3,054 in 2011-12).
Hence, data shows that while penetration of non-cash has increased considerably with efforts put in by banks and the government, the habit has not caught on commensurately. There is still preference for cash and some hesitancy in use of cards. Credit cards are often used as debit cards where payment is made on time. Debit cards, though useful and forced on consumers, are not accepted universally, in say, a bus or cab or kirana shop. Unless this happens, people, will continue to transact in cash. This infrastructure has to be built to provide access besides making the use of debit cards free of cost.
High-value cash transactions in gold or property are hard nuts to crack and contrary to the western view that demonetisation of larger values helps, it may not be suitable. Inflation is high in the country and the purchasing power of even Rs 1,000 note is low – cannot cover consumption of 1 litre of milk for a month. Theoretically, one can switch over to a new currency and then issue small value currency, thus starting afresh. But this is not feasible. Cash will continue to reign in the wallet.
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