demonetization – a precursor to cashless society

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Demonetization – A Precursor to Cashless Society Dr.G.Veerakumaran Professor Department of Co-operative Management, College of Co-operation, Banking and Management, Kerala Agricultural University, KAU Post-680656, Thrissur, Kerala, Email: [email protected] 06/21/2022 1 The Madura College-National Seminar

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Page 1: Demonetization – A Precursor to Cashless Society

05/02/2023 The Madura College-National Seminar 1

Demonetization – A Precursor to Cashless Society

Dr.G.VeerakumaranProfessor

Department of Co-operative Management, College of Co-operation, Banking and Management,

Kerala Agricultural University, KAU Post-680656, Thrissur, Kerala,

Email: [email protected]

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Content of Presentation– Background and Justification for

Demonetization– Demonetized currencies – Criticism on Demonetization – Impact on Banking operations– Impact on Society and Economy– Cashless Society– Different Platforms– Impediments– Conclusion

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Background and Justification for Demonetization in India

• The incidence of fake Indian currency notes in higher denomination has increased.

• For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied.

• The fake notes are used for antinational and illegal activities.

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Background and Justification for Demonetization in India

• High denomination notes have been misused by terrorists and for hoarding black money.

• India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace.

• In order to contain the rising incidence of fake notes and black money, the scheme to withdraw has been introduced.

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Demonetized currencies• The legal tender character of the existing

bank notes in denominations of Rs. 500 and Rs. 1000 issued by the Reserve bank of India till November 8, 2016 stands withdrawn.– Rs.16,634 billion notes were in circulation– Rs.14,179 billion were demonetized(86 %)

• In consequence thereof these Bank Notes cannot be used for transacting business and/or store of value for future usage.

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The Specified Bank Notes (Cessation of Liabilities) Ordinance 2016

• President Pranab Mukherjee signed the Specified Bank Notes (Cessation of Liabilities) Ordinance, 30th December, 2016 on Friday.

• After the period of exchange is over, the liabilities of the Reserve Bank and the guarantee of the central government towards the specified bank notes will stand extinguished

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Criticism on Demonetization

• In the absence of steps to curb the generation of black money, demonetization is a futile exercise– Tax reforms to tax evasion –Make it easy to do business-red tape,

lethargy and corruption and coercion• 5-6% of black money is kept in hard

cash

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Criticism on Demonetization

• Fake currency is in circulation in the Indian economy. This is only .028% of Rs 14,179 billion worth currency demonetized in Rs 500 and Rs 1000 notes

• Terrorists are not about to quit their evil acts because of a currency change(Steve Forbes)

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Criticism on Demonetization • By stealing property, • further impoverishing the least fortunate

among population and • undermining social trust, • thereby poisoning politics and • hurting future investment, • India has immorally and unnecessarily

harmed its people, • while setting a dreadful example for the rest

of the world(Steve Forbes)

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Impact on Banking operations

• Deposits close to 94% of total demonetized currency

• CD ratio is decreasing 73% to 69%• Jan Dhan accounts swell with large

quantum of deposits• Banks have access to more deposits

and large proportion of low cost deposits

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Impact on Banking operations

• Fall in the interest rate will be gradual• Fall in profitability as well• We cant afford a flight of foreign funds

invested in the financial markets• If SME are brought under banking

system- banks can lend more that will yield more than from corporate lending

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Immediate Impact on Society and Economy

• Agricultural Sector – input supply and – Fall in price of agricultural produces

• Defunct of Cooperative Movement• Increase in unemployment• FMCG sales and trade drop• Inflation fell• Trade deficit widened• Rupee Value has comedown

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Cashless Society

• The ability to pay for something with a card or a mobile phone or internet account

• digital payments can improve the State’s ability to – curb tax leakages, – funding of criminal activities and – reduce cash related costs.

Source: Committee on Digital Payments

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Cashless Society

• Cashless vs. less cash society• Present status of cashless

transaction in India 2 %

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Top ten Cashless Countries Source: Business Today 30.11.2016

Country % of Cashless

TransactionsSingapore 61

Netherlands 60France 59Sweden 59Canada 57Belgium 56

UK 52USA 45

Australia 35Germany 33

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Different Platforms

• Prominent Practices– Demand Draft, Cheques, – National Electronic Funds Transfer

(NEFT) is one of the most prominent electronic funds transfer system of India, which facilitates one-to-one funds transfer

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Different Platforms

• Prominent Practices– Real-time gross settlement systems

(RTGS) are specialist funds transfer systems where the transfer of money or securities takes place from one bank to another on a "real time" and on a "gross" basis

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Different Platforms

• Immediate Payment Service (IMPS) is an instant interbank electronic fund transfer service through mobile phones.

• It is also being extended through other channels such as ATM, Internet Banking, etc.

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Different Platforms

AEPS is a bank led model which allows online interoperable financial inclusion transaction at PoS (MicroATM) through the Business correspondent of any bank using the Aadhaar authentication.

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Different Platforms

Bharat Interface for Money is an app that lets you make easy and quick payment transactions using UPI. Its easier than Wallets! You will not have to fill-out those tedious bank account details again and again.

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Different Platforms

• Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood.

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Government Intervention • Committee of Officers constituted under the

leadership of CEO, NITI Aayog, are taking steps to identify immediate steps to promote understanding and adoption of available digital payment options.

• More recently, a Committee of Chief Ministers has been constituted on 30 November 2016 under the Chairmanship of Chief Minister of Andhra Pradesh to accelerate digital payments.

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Government Intervention

• Initiatives of National Payments Corporation of India

• DIPAYAN (Digital Payment Action Network) from savings generated from cash-less transactions to expand digital payments

• Legal Reforms by the Government

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impediments

• Large unbanked population- still around one third of the adults

• Illiteracy and ignorance• Income Level of People• Age structure of People• Use of internet by women and the

suppressed mass

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impediments

• Limited spread of E-commerce• Lack of appropriate Mobile Phones• Lack of Internet Connectivity• There is issue of electricity

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impediments

• Communication lines are not robust• Lack of Point of Sale Machines and

ATMs• Lack of merchant support• Transaction Cost

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impediments

• Cyber Security and Privacy– Frauds that can happen on electronic

and digital platforms– There is no hack-proof technology • Wiki leaks• US Democratic Presidential Campaign• Yahoo• breach of Debit cards in October

– Cyber attack

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impediments

• ATMs and POS can be hacked with malware• Increasing magnitude of Mobile wallets

frauds• Lack of clarity on grievances redressal and

reconciliation of customer complaints A basic mistrust of humans and

excessive faith in machines(satish Despande)

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Immediate Beneficiaries• E-com

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Conclusion• India has a unique opportunity to leverage

the Jan Dhan, Aadhaar and Mobile (JAM) trinity to rapidly enable ordinary Indians to participate in digital payments.

• Cashless societies are generally corruption free.

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Conclusion• One can think of endless

objections to change, but most are quite superficial and can easily dealt with, especially given a long transition period.

• Kenneth S Rogoff, Author of ‘The curse of Cash’

• Let us try

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• They give sorrow to sorrow, who in sorrow do not suffer sorrow.