Though our banking system is developing fast, access to banking is not available to one-third of our population and ramifications of a hasty decision to penalise usage of cheques will be too catastrophic for a nation like ours

The Reserve Bank of India’s (RBI) discussion paper on “Dis-incentivising issuance and usage of cheques” has generated two articles in Moneylife, which are worth reading, as it might affect your daily life.

Read:

1. RBI must scrap the no-cheque idea

2. Incentivise usage of electronic payment systems before dis-incentivising usage of cheques

How distorted could be the discussion paper to suit the whims of people in power is clearly evident from the following concrete example:

Republic of Ireland’s decision to phase out usage of cheques

The discussion paper contains a reference to the Irish government’s decision to phase out the usage of cheques in their country which reads as under:

“The report ‘Target 2013: Modernising Payments in Ireland’ prepared by the National Irish Bank in September 2010 outlines the unique characteristics of the payments industry which justify the need for intervention in reducing the cheque usage in that country.”

As per the Irish report, the justification for reducing cheque usage is the social cost—i.e. paper-based systems such as cheques and cash come with considerable cost to the society. Besides the obvious financial costs related to cheque usage such as printing, security, postage, clearing and handling costs etc, high cheque (and cash) usage also bring other non-financial costs to the users/society such as growth of a shadow economy, environmental damage, security risks, etc, the report said.

Based on this report, the Irish Payment Association has set a target date of end 2016 for abolition of usage of cheques, with the support of the Irish government, which has introduced changes in the stamp duty on cheques versus other payments, to discourage usage of cheques.

UK government bows down to public pressure and rejects abolition of cheque system

In the United Kingdom, the Payments Council, the industry body representing banks and payment groups had earlier announced that the usage of cheques would be completely abolished in that country by October 2018.

As per the BBC News of 12 July 2011, in view of the widespread criticism from MPs and many charitable organisations of UK for the proposal of the Payments Council to replace the cheques by electronic payment system, the UK government had referred this matter to the Parliamentary Treasury Select Committee, which has, after listening to 600 stakeholder groups, banks and trade bodies, overwhelmingly rejected the proposal of the Payments Council for the following reasons:

1. The scrapping of cheques would have had serious ramifications not only for the elderly and most vulnerable in society, but also for small businesses and charitable organisations that rely on the cheque system for all their payments.
2. A decision of this size, which affects millions of people, businesses and charities, should not be imposed on people de facto. The Payments Council has not thought through its arguments carefully enough and its first piece of work on the cost-benefit of abolishing cheques was clearly defective.
3. The Payments Council had seemingly forgotten about the millions of people who remain less at ease with the latest technology
4. Many charities, small business and vulnerable people—including pensioners—depend on cheques. Their needs must be considered. They should not be forced into shredding their cheque books
5. Michelle Mitchell‚ director of Age UK‚ said: “Scrapping cheques without there being a suitable replacement is not acceptable. If you find it difficult to leave the house then cheques are often crucial in allowing you to pay bills securely and safely. Taking that option away could leave many vulnerable older people with no choice but to hand over their PIN numbers and cash cards to others, going against all the guidance given by banks, and putting them at the risk of frauds”.
6. According to Mark Hoban, Financial Secretary to the Treasury, It would have been irresponsible for banks to abolish the cheque system before a credible and coherent alternative had been developed.

As per the report in the Daily Telegraph, London dated 12 July 2011, in view of the decision of the Parliamentary Committee to continue with the existing cheque system without any changes, the Chairman of the Parliamentary Committee had said that banks must stop discouraging customers from using cheques and that any decision on cheques should be decided in the interest of the consumers, and be subject to proper accountability. He had also said that the Payments Council should concentrate on making the existing cheque system faster and cheaper to operate, which will benefit both the banks and customers.

It is surprising that while the decision of a tiny country like Ireland to abolish the cheque system is fairly brought out in the discussion paper of the RBI in support of the proposal, the decision of the developed country, the Mecca of banking like Great Britain to completely shelve the idea has not even found a casual mention in the discussion paper, though the decision in UK to scrap the project was taken as early as in July 2011—much before this proposal was thought of by the RBI.

Demographic details of three countries

Here are demographic details of how these three countries stand in comparison with each other to appreciate the need for a rational approach in deciding on this project.

The Republic of Ireland with a population 4.6 million (46 lakh), 100% literacy rate, English as a single language of communication that is the language used in banking, and a per capita income of $42,682, has taken a decision to abolish the cheque system.

The United Kingdom with a population of around 62 million (6.2 crore), 99% literacy rate, English as the only language of communication which is followed in all banking transactions, and a per capita income of $35,657 has jettisoned the very idea of abolishing the cheque system, though banks and payment associations were keen to implement in it in their own self-interest.

India with a population of 1.22 billion (122 crore), a literacy rate of 74% as per the official estimates, having 22 official languages and with less than10% of the literate population having the knowledge of English—the language generally used by all banks in India, and a per capita income of $3,627 as per World Bank estimates, is most unsuitable even to think of dis-incentivising the usage of cheques, which has been a credible means of payment seven days a week, 365 days of the year for more than several decades.

Way forward

Though our banking system is developing fast, the access to banking today is not available to one-third of our population and ramifications of a hasty decision to penalise usage of cheques will be too catastrophic for a nation like ours, which requires social upliftment and inclusive banking before forcing technology on our people.

Will the RBI, too, shelve the proposal on the lines of UK government in the interest of large majority of our people, and ensure that banks in our country too provide cheap and safe banking to attract those who are outside the ambit of banking, which should be the priority of our government now?

Other stories from Gurpur.

(The author is banking professional, he writes for Moneylife under the pen-name ‘Gurpur’)