Strict KYC for digital payments - death of India's digitalisation push?
In a situation that is all too familiar to Indians now, ATMs across the country began to run dry last month. Only this time there was no obvious explanation for this. With no data at hand, myriad theories did the rounds even as banks and the Reserve Bank of India claimed business as usual. The Finance Ministry issued a note saying the situation has come about due to an "unusual spurt in currency demand in the country" and that adequate notes would be printed to meet the higher levels of demand.
 
The "unusual spurt" could have been be due to the cash hoarding in poll-bound states like Karnataka, Madhya Pradesh and Rajasthan. Incidentally, the cash shortage was more acute in these areas. But, Indian states are in a perpetual election cycle so that might have been an enabling factor but not the root cause of the problem.
 
An argument was also made that following the spate of fraud and corruption scandals that have rocked Indian banks over the last few months, it is possible that depositors have lost faith in the system and have chosen to withdraw their money from it. After all, trust is the very basis of the existence of these institutions. But, considering the fact that the world economies survived the 2008 financial meltdown, the confidence in the banking system can be said to be far more resilient than a couple of malpractice issues.
 
There are two aspects, however, that have specifically taken place over the last few months and could explain the cash crunch. First, is the sudden dip in digital transactions while the amount of currency in the economy has still not reached optimal levels? The absolute level of currency in circulation recently went above the level it was before the demonetisation exercise was undertaken in November 2016. But, this provides a misleading picture. In relative terms, the currency in circulation has been around 12 per cent of GDP since the last available estimates from 2002. This dropped to around 6.3 per cent when the demonetisation exercise took place and has been recovering since. As per the latest RBI data from April, this ratio has only reached 11 percent, implying that the cash in the economy is still below the pre-demonetisation peak.
 
Now, if the currency levels have not reached normalcy since demonetisation, why has the cash shortage become apparent only now? It so happens that digital payments had been compensating for the cash shortfall. According to RBI data for electronic payments, which is only available until February, payments over platforms like mobile wallets and UPI have significantly picked up since November 2016.
 
However, RBI imposed strict know-your-customer (KYC) norms on all digital platforms with a last date of February 28. The official estimates are yet to come in, but most players in the payment business have reported a drop of about 40-45 percent in transactions through digital wallets in the first week of March. Customers have found it convenient to shift to cash rather than complete KYC formalities. So, a cash shortfall along with a drop in digital transactions could have easily resulted in a demand-supply mismatch.
 
Second, the government or the RBI have not been clear on the matter, but it is becoming increasingly clear the printing of the Rs 2,000 note is being either reduced or stopped. An increase in the circulation of the Rs 200 denomination notes are being undertaken to compensate for it. The idea is to increase the amount of small denomination notes within the economy so that cash facilitates only the transactional demand of the public and the prevalence of black money is curbed. However, for lower denomination notes ATMs have to be replenished more frequently and this could have given the impression of cash scarcity.
 
Any impression to the public that cash was in short supply due to either of the two reasons could have triggered hoarding due to panic and further accentuated the shortfall. Therefore, prima facie it appears so that the situation is more of a supply-side problem and will cease to be an issue once pre-demonetisation levels are achieved. A more accurate picture will appear once more data becomes available.
 
So, the cash situation is not as big a problem in the long-run. A more concerning issue that emerges out of this whole affair is the waning interest in digital payment platforms due to stricter regulations. If this is the beginning of a trend, it will signal a quiet death of India's digitalisation push. It will be interesting to see how the government and the RBI respond to the challenge. Ensuring behavioural change through policy can be complex since it is easier to stay on the path of least resistance. For India, that implies reverting back to being a cash-dependent economy. 
 
The solution lies in making the adoption of digital payments easier. The KYC norms, although necessary, probably need to be relaxed or made possible to complete without the hassle of visiting retailers. Also, probably the low incidence of high denomination notes can help to an extent by increasing the transaction costs of being dependent on cash and, thus, encouraging a move towards digitalisation.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
 

 

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SEBI allows extension of trade hours till 11.55pm for equity derivatives
Market regulator Securities and Exchange Board of India (SEBI) has allowed stock exchanges to extend trading hours in equity derivatives segment between 9am to 11.55pm. After receiving approval from the market regulator, stock exchanges can extend trade time from 1 October 2018.
 
In a statement, SEBI said, "With a view to enable integration of trading of various segments of securities market at the level of exchanges, it has been decided to permit stock exchanges to set their trading hours in the equity derivatives segment between 9am and 11:55pm, similar to the trading hours for commodity derivatives segment which are presently fixed between 10am and 11:55pm, provided that the stock exchange and its clearing corporation(s) have in place risk management system and infrastructure commensurate to the trading hours."
 
However, stock exchanges, which want to extend trade timing beyond the present trading hours, are required to take prior permission from SEBI. To seek the permission, stock exchanges will have to submit details like their framework for risk management, settlement process, monitoring of positions, availability of manpower, system capability and surveillance systems, the market regulator said.
 
Commenting on the SEBI decision, Ashishkumar Chauhan, Managing Director and Chief Executive of BSE, said, "We welcome SEBI's move to permit Indian stock exchanges to set their trading hours in the equity derivative segment between 9am and 11.55pm. Globally, the derivative exchanges are already following the extended trading hours. The introduction of the extended hours is a positive development and will bring Indian market in line with International market and Indian Commodity derivative markets".

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COMMENTS

THE RESPECT

6 months ago

with extended timing trading and minting, money will be difficult this is what I believe.

While the regulator wants to start the new trading hours from October 1, brokers say they need at least six to eight weeks to complete testing. They said after-hour trading would expose their systems to more risks, as volume and liquidity may be thin in the first few months, ET reported last week.
Brokers want derivatives trading to run only 90 minutes longer than the current 3:30 pm close as the cost of additional headcount for a longer extension wouldn’t be justified by any increase in revenue, at least initially, ET reported quoting sources.

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Voluntary code on corporate governance, transparency soon: CII President
A voluntary code of conduct for industry towards greater transparency and better corporate governance is on high priority for the new CII President Rakesh Bharti Mittal in the wake of scams afflicating the banking sector regarding corporate loans.
 
"We will be bring out voluntary codes of corporate governance for industry compliance -- one for large companies, another for smaller ones and one for the financial sector," Mittal told IANS in an interview here. 
 
The new president of Confederation of Indian Industry (CII) -- an apex body -- said that doing business ethically and transparently, with social responsibility, featured high on the list of imperatives for Indian industry at the juncture. 
 
Noting that the low investment rate remains a deterrent to growth, Mittal said that bank NPAs, which had crossed a staggering level of Rs 9 lakh crore, and the "over leveraging" of corporate India, could constrain investments further.
 
The CII's focus on governance comes in the backdrop of the recent Rs 13,600 crore fraud on state-run Punjab National Bank by the accused diamantaire Nirav Modi and his uncle Mehul Choksi, who along with industrialist Vijay Mallya are currently absconding, even as the government has set in motion the process for bringing them back from overseas to stand trial. 
 
"We will also work with companies to develop governance in their supply chain. My theme for the CII this year is 'India Rise', where the 'R'is for 'Responsible India' and focuses on governance, transparency and social responsibility. The other letters in 'rise' stand for inclusive, sustainable and entrepreneurial India," he said. 
 
On corporate debt, he said that certain sectors were "overleveraged" but that the whole industry should not be painted with the same brush. "Corporate debt can be a result of bad business outcomes resulting from factors beyond the control of the company," he said.
 
"The other category is that of fraud, where there is wilful default and both government and regulator should differentiate between the two. Any wilful defaulter should be given the maximum punishment as a deterrent," Mittal said, pointing out that the Insolvency and Banruptcy Code (IBC) "is addressing some of these NPAs".
 
The government has embarked on a two-pronged strategy on bad loans. On the one hand, it has brought in the IBC which provides for a six-month time-bound insolvency resolution process, extendable by another 90 days. On the other hand, it has approved a Rs 2.11 lakh crore recapitalisation plan for state-run banks.
 
Noting that "100 per cent losses are not being written off" in NPA resolution and "other businesses are being encouraged to revive stalled projects", Mittal pointed out that some of the stressed assets were drawing good bidder interest for revival, particularly in the steel sector, where the favourable short-term outlook has helped to raise steel prices.
 
"Lending institutions will now be more cautious on loans which is a good thing," he said.
 
He also said that the country's current falling investment rate of less than 30 per cent could be the result of the "change in dynamics of demography" whereby India is moving from "a saving to a spending economy", which is a positive in terms of demand.
 
"The strength of our economy is in domestic demand," the CII President said. 
 
In this connection, he welcomed the government's resolve to double farmer incomes and the measures to help the stressed agriculture sector as outlined in the Budget for 2018-19. 
 
"Agriculture has been languishing too long on archaic policies. Time has come to rank the states on agri-reforms in the way they are competing on ease of doing business rankings," he said, adding that parametres for this should be land lease, high-value crops, water management, no free power and micro irrigation, among others." 
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
 

 

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