In a country like ours, where a large part of our population is outside the ambit of banking with no access to basic banking facilities, it is unwise and undesirable to restrict the usage of banking facilities and impose upon them banking technology which is yet to penetrate into the minds and hearts of the people

A discussion paper on “Dis-incentivising Issuance and Usage of Cheques” (available for comments up to 28 February 2013), put up by the Reserve Bank of India (RBI) on its website, is a classic example of putting the cart before the horse. Because there are problems galore in the electronic payment system, and even before stabilising this, the RBI wants to dispense with the cheque system. If the same objective of reducing usage of cheques can be achieved by incentivising the usage of electronic payments, why not try this positive method, which has more acceptability and receptivity, instead of going in a negative way for achieving the same results?

The present discussion paper appears to be a purely in-house exercise of the RBI, done without any appreciation of the ground realities and the psyche of the people affected by it. It is complete negative thinking and devoid of any consideration for the financially, technically, virtually and literally less-literate people of our country who happen to be in large numbers. Hence if the proposal contained in the discussion paper, is implemented, it will only result in going back to the days of cash transactions, as people will prefer settlement through cash instead of suffering under the half-baked and mal-implemented technology in our banking system and the poor service extended by banks in the name of automation. It is to avert this situation, the following suggestions are made and hopefully the RBI will reconsider its proposal and take a positive view in the interest of a large majority of banking public affected by this proposal.

Before dis-incentivising the usage of cheques, let us take the following important steps to create an environment of bringing down usage of cheques slowly through the change in the attitude of users of cheques.

RBI’s revised directive on bulk deposits does not help the large number of bank depositors

1. Perfect the present electronic payment systems

The most important thing is to make all electronic payment systems fool-proof and acceptable to all payers and receivers who should be satisfied with the 100% safety of the system and acceptability in settlements of all dues without any question at a future date. Unfortunately, banks are not giving enough importance to these aspects, resulting in the consumer not developing enough confidence in the system to rely upon in case of need. Therefore, the imperative need is to perfect the present electronic payment systems, which require a lot of improvement both in their form and content. The account numbers in all the banks are to be standardised, the multiple systems’ code used in all these payment transactions are to be harmonised into a single code for all payments, including international remittances. NEFT requires to be merged with RTGS to make the former too a real time payment system and to ensure its simplicity and robustness.

In the good old days of manual banking you used to receive a handwritten credit advice for every credit or debit affected in your account. With the advent of electronic banking, such credit and debit advices are lost in the jungle of computers. You now get an entry in your pass book with a reference number of the transaction, which does not make any sense to the account holder. Earlier, reading the advice was a problem due to the illegible hand writing, today you do not even get any information about the purpose of debit or credit entry. Recently, when a senior citizen went to his bank and got his pass book written up, he found a credit entry for which there was no explanation. When he asked for the name of the remitter, the clerk did not provide any information saying that it was not available on his computer. Only when he raised his voice, the branch manager came out and helped him with all the details, culled out from the same computer. This is the level of service you get from the computerised bank branches today. The RBI should first ensure that full details of remittance are furnished—without asking—to the remitter and the beneficiary for all electronic receipts and payments made through banking channels, as these details are vital for all businesses and individuals for tax purposes.

The technology used by different banks for different channels of payment are so wide and varied that it is virtually impossible for a layman to be abreast with so many changes taking place so fast. Today electronic payment is provided through multiple channels like internet banking, core banking, ECS, mobile banking, ATMs, and through the counters of branches but each bank follows a different method of operations. Hence, there is a need to standardise these systems in all banks, so that banking public can use them with ease. There is a further need to ensure that all the applications, advices, etc are standardised in all the banks to make it simpler for the common man to follow them without much confusion.

2. Make all electronic payment channels free of all charges

There are several electronic payment channels today and for every channel there are different charges levied by different banks according to their own fancy, without any regard to the cost of operations. Under core banking you can bank with any branch of a bank as all branches are interconnected through computers. But many banks do levy a charge if you deposit a cheque or cash at any branch other than the home branch. In order to encourage more and more people to go for electronic payment channels, as a first step, the RBI should direct that all remittances made using all types of electronic payments either online or through the counters of the branches of banks, must be free of all charges, in order to change the psychology of people by making available these services without any costto the users.

3. Incentivise all types of electronic payment systems

If you see the chart No.2 displayed below culled out from the RBI discussion paper, it is obvious that in terms of volume, the use of paper payment system (blue shaded) has remained almost stagnant for the last five years, though the additional volume has been coming from the electronic payment system. This is because the chronic semi-literate banking public continue to follow the old system of payment through cheques and therefore the immediate task of banks is to convert these core users to the new system by offering them all types of incentives and goodies outlined here, instead of forcing them into electronic systems much against their free will.

1. The best way of incentivising the usage of electronic clearing system (ECS) is by giving a discount on payment of bills through ECS, which has been very successfully introduced by BSNL and MTNL, the two leading public sector telecom companies for the last several years. The system of giving 1% discount to all those who pay the telephone bills of these two companies through ECS has been the best  example of eco-friendliness much before the RBI woke up, thereby saving on cost of operations and in the process helping them to improve their cash flow by better debt collection. This worthy example should be replicated in all the utility companies both in the public and private sector, thereby giving a boost to the electronic payment system that RBI wants to propagate now. Public sector banks can play a very pro-active role in persuading all utility companies like power; water, etc, banking with them by giving them a bait of reduction in interest rate if their bills are collected through the ECS system which benefits both the bank and its customers.                                    

2. The RBI should not only allow but actively encourage banks to offer tangible incentives for all users of the electronic payment systems through all available channels. And this incentive can either be by cash-back as offered by some banks on debit cards, or through a reward system of points offered by some banks on credit cards, leaving it to the imagination of banks to sew up their own preferred mode of incentives, thus attracting the customers to use these payment channels in the place of cheques. If  the banks are able to convert their customers from cheque users to electronic payment systems they will benefit from lower staff cost, lesser cost of stationery and cheque leaves, and  less of frauds in cheque usage, thus saving in cost of operations, and a part of this saving can be used to provide different type of incentives mentioned above.

3. The RBI should lay down stringent guidelines for payment of compensation to the customers, whose remittances have been delayed, not credited, or bounced for no fault of theirs. This can be on the lines of compensation presently paid for the delay in reimbursing the amount debited but not dispensed by ATMs due to the fault of the machines as decided by RBI.

4. Life Insurance Corporation of India and other private insurers should also be asked by the insurance regulator, IRDA (Insurance Regulatory and Development Authority) to implement payment of insurance premiums through ECS by allowing a discount, as a large number of people still pay the premiums either in cash or through cheques, as is evident from the long queues seen outside the LIC offices on most days.

5. Public sector banks often hold celebrations like “Savings Month”, “Deposit Month”, and “Home Loan Festival”, etc, but no celebrations appear to have been held by any bank in the country to popularise electronic payments. The RBI should advice the banks to announce special periods for popularising electronic payment systems, when they could give some goodies, within the limits prescribed by the central bank, to customers who avail electronic remittance services. This will not only go a long way to educate customers on all electronic payment services, but will also help the banks in reducing cost of operations in course of time by automatically reducing usage of cheques. 

Do not rock the boat of livelihood of small traders and businessmen

A little known fact of life is that many small businessmen, petty traders, micro and mini industrialists do their business successfully by using cheque leaves as security for taking delivery of goods and or selling their products on credit, thereby earning their livelihood with integrity and honesty all over the country. Moreover, cheque leaves come handy for running their business during weekends or prolonged bank holidays, as they can take delivery of goods by tendering cheques, which keeps the supply side of essential goods running for the benefit of common people who depend on petty traders for their daily needs. And any restriction on usage of cheques will, therefore, be not only detrimental to their interest, but a great blow to their livelihood as well. It is therefore, not in the interest of a large majority of our people to create artificial barriers in the smooth running of their business and trade, by making it difficult to use the facility of cheques, which have gained credibility after the amendment to the Negotiable Instruments Act, making bouncing of cheques a criminal offence.

In a country like ours, where a large part of our population is outside the ambit of banking with no access to basic banking facilities due to illiteracy, lack of banking facility, sparse penetration of broadband technology in the countryside and very limited financial literacy, it is unwise and undesirable to restrict the usage of banking facilities presently enjoyed by the people and impose upon them banking technology which is yet to penetrate into the minds and hearts of our people. Let all our banks concentrate and dedicate themselves to the cause of financial inclusion and spread banking through education, motivation and persuasion following a path of least resistance to make access to banking facility to our billion plus people a reality at least by the end of this decade.

Let not irrational exuberance of a few technically knowledgeable people play havoc with the large majority of our countrymen and women, who need empathy as well as sympathy in carrying on with their day-to-day life with understanding and peace of mind. Let us, therefore, give the discussion paper a decent burial at least for the time being and think of what positive steps can be taken to prepare our people for a slow but sure technological change, though it may take a little longer time to achieve the objective which has given birth to this idea of new age banking.

Other stories by Gurpur.
 

(The author is a banking professional and he writes for Moneylife under the pen-name ‘Gupur’.)

RBI’s sector-wise monthly loan data for December 2012 reveals that credit cards, personal loans and vehicle loans are doing well

The RBI (Reserve Bank of India), in a sector-wise analysis of credit growth, released its monthly loan data for December 2012 and a Nomura Equity Research analysis of the key trends reveals a few important observations:

(a) Loan growth for FY13 is most likely to range around 13%-14%. YTD (year-to-date) loan growth has been 7.8% (non-annualised) and assuming the same quantum of loans in 4QFY13 as disbursed during 4QFY12, Nomura arrives at FY13F loan growth of 13.5%;

(b) Retail loans and agriculture loans are tracking the strongest—retail loans growing at 16.5% year-on-year and agriculture loans growing at 21.4% year-on-year. Within retail, the segments doing well are non-collateralized loans (credit cards and personal loans) and vehicle loans;

(c) Industry loans continue to be weak and YTD, the key growth drivers within the industry have been power, iron and steel, chemicals and roads.

As of December 2012, aggregate non-food credit growth was 14.3% year-on-year with primary contributions from industry (13.7% year-on-year), agriculture (21.4% year-on-year) and retail (16.5% year-on-year).  

On an YTD basis (April-December 2012), aggregate non-food credit growth was 7.8% over the base of March 2012 compared with 17% in FY12 and 20.6% in FY11. The key contributions to YTD growth have come from retail loans at 9.8% and services at 8%. Agriculture loans grew at 7% while SME loans grew at 4%. Ex-infra industry growth was 5.5% during this period, according to the Nomura analysts’ computation. 

Within the industry sector, YTD growth for key sub-sectors was at 17.8% for power, 15.7% for iron and steel, 9.7% for engineering, 10.6% for roads, and 10.8% for chemicals. Loans to the telecom sector were flat YTD, points out Nomura. 

Within retail loans, vehicle loans had the highest YTD growth at 16.6%, followed by non-collateralised loans at 13.7% and mortgages at 9.5%. On a year-on-year basis, vehicle loans grew at 22.2%, non-collateralised loans at 26.4% and mortgages at 16.4%. 

In the services segment, loans to NBFCs (non-banking finance companies) had the highest YTD growth at 14.3%. This is weaker than the growth seen during similar periods of FY12 and FY11. Trade and commercial real estate loans had YTD growth of 13.7% and 11%, respectively. 

If it is assumed that the same quantum of loan growth for January 2013 to March 2013 as was achieved during January 2012-March 2012, then the banking sector is likely to have loan growth of 13.5% for FY13F. This is marginally lower than the Nomura estimate of 14% calculated with the data for the period ending November 2012. 

Assuming that all these major sectors add loans similar to the quantum seen in January 2013-March 2013, Nomura believes that the banking sector is looking at the following potential growth rates for FY13F: aggregate non-food credit growth of 13.5%; industry growth of 13%; agriculture growth of 18.8%; SME growth of 11%; and retail loan growth of 15.5%.