India loves spending cash. Cash in India is the most readily available and widely used form of payment in India. Conventional wisdom in India assumes that cash is free which makes India extremely cash intensive, even for a developing country. Even Indians with access to formal banking tend to carry a lot of cash with them—typically in high denomination bills considered to be “Black money”; a well-documented failure of governance in India with profound consequences for tax revenue, corruption, and law enforcement in general. In 2012, for instance, 67% of all transactions in India were cash-based. Cash also fuels India’s huge informal economy, which constitutes 23% of official GDP, according to one of the estimates.
However, since we are moving towards modernization and setting up smart cities in India with huge influx of FDI, it is significant to understand the level of impact of this overdependence on currency for payment for businesses.
If we look at the root cause for huge costs of cash consumption, one reason for the increased dependence on cash is the lack of access to banking with a third of the population over 15 years not having used a bank account. Most Indians lack the means to use cashless alternatives, irrespective of their desire to do so. Households pay differently for access to cash according to their place in society, determined by income, employment, age, and place of residence. They also hold widely differing views on the risks of cash and strategies for risk management.
From a business perspective, cash is widely used to drive India’s underground economy. While the cost of using cash is high, there are loopholes that retailers need to overcome such as:
1) Restricted number of ATM withdrawals.
2) Shop owners charge extra when the consumer tries to pay via credit/debit card.
The growth in value of ATM transactions has far outpaced the growth in the value of card payment transactions. Although non-cash payment systems such as the Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT) and National Electronic Clearing System (NECS) have been set up, the use of mobile banking is still in its early stage.Despite its progress in the telecommunications field, India has been left behind by its peers in mobile payments.
From a tax perspective, cash transactions are mostly used to avoid taxes. Of course, reforms in taxes can lower the use of cash because with greater use of non- cash transactions,the extent of black money gets reduced automatically.Aadhaar, India’s Unique Identity project, will significantly reduce costs of serving India’s unbanked population. For banks and their partner banking correspondents, this will mean a significant reduction in the costs of complying with “know your customer” (KYC) norms during account opening and assessing credit risk histories of low-income borrowers.
For businessmen, its important to know that they can avail loans under various schemes if they show a robust enterprise (regardless of size) and the zero interest credit period provides short-term financing at no cost for borrowers that are able to manage timely payments. EMIs transform large lump-sum payments into smaller, regular expenses with no additional paperwork. And reward points can yield cash or shopping discounts to qualifying cardholders with timely payments.
As a SME owner, you are entitled to information that will help you acquire non-collateral loans or funding for your business or tax exemptions. With #UCANPeriGrow, we provide consulting services to business owners regarding best practices for their business from a financial standpoint.