For a cashless society, rules need to be changed

As Raghuram Rajan nears the end of his term as Reserve Bank of India governor, the clamour over an extension of his tenure has grown. Should Dr Rajan not get an extension, his signature on Indian currency notes will have to be replaced by that of his successor. It was reported that when  Dr Rajan took over from D. Subbarao in 2013, the official printing press forgot to replace the signature on currency notes of some denominations for a few months, that led to infructuous expenditure of around Rs 37 crore. A RTI query in 2012 revealed that the cost of printing a currency note ranges from 50 paise to Rs 5, depending on its denomination. The RBI Annual Report of August 2015 highlights that the total cost of printing currency notes was approximately Rs 3,760 crore in 2014-15 (July-June).

The use of physical currency is costly for society, with the poor spending more time, efforts and resources than the rich to access cash. These include the opportunity cost of travel to bank branches or ATMs, withdrawal charges, and the need to submit physical documents to open and access bank accounts. This acts as a disincentive for the poor, who turn to expensive yet easy-to-access informal sources of finance for their needs. Banks are required to invest in infrastructure to handle paper documentation and physical currency.

The government and industry have been at work making coordinated efforts to move towards a society using less cash and less paper. These include transfer of subsidies directly to bank accounts and the design of innovative, efficient, secure and instant modes of digital payments. However, without a comprehensive relook at the current regulatory architecture, the economy might not be able to fully benefit from such efforts.

So far, regulations have focused on in-person banking via physical documentation throughout a customer’s life cycle. For instance, opening a bank account requires the submission of two photographs, certified copies of documents verifying the customer’s identity and address and other related papers. Bank branches are required to have proper furniture and drinking water facilities, display indicator boards, provide customers with booklets on all services, have a comprehensive notice board with a size of 2x2 feet with prescribed information, and provide printed material in the form of pay-in slips in the relevant languages. In addition, banks have to issue physical passbooks or statements of accounts, cheque books and allow a minimum number of free ATM transactions.

These measures have been mandated to ensure the safety and convenience of consumers. But they also impose excessive costs on industry, that is eventually passed on to consumers. To accommodate and promote an economy with less cash and less paper usage, the approach to regulation will have to be refreshed. While keeping consumer protection and empowerment at the core, the regulations should allow for innovation and disruptive technology to experiment. The regulations will have to balance the risks from the use of cheap innovative technologies with the risks of financial exclusion through the use of expensive traditional modes of reaching consumers.

Regulations must focus on “what” rather than “how”. It must shift from prescribing eligibility and compliance to monitoring and fixing accountability. For instance, the regulations should provide for standards of consumer convenience, grievance redressal and protection. But it should not require consumers to provide physical papers and documents, banks to maintain branches with minimum infrastructure, or compulsorily issue passbooks and cheque books.

Already, technologies are available that allow submission of digital copies of documents in a safe and secure way, by way of DigiLocker promoted under the Digital India mission. E-KYC facility provided by UIDAI that allows customer verification via source through express consent of the consumer. Unified payments interface will allow secured and instant transfer of funds without the knowledge of the account holder. E-passbooks and 24x7 grievance redressal mechanisms are being developed by service providers to better serve consumers. These allow banks to engage with consumers at a low cost, and thus allows them to expand their reach, and compete efficiently with exploitative moneylenders. Regulations will need to recognise the potential of these technologies and allow them, without compromising with basic principles to serve customers’ interests.

The need for regulations to allow innovation and technology has become much more imminent with the introduction of differentiated banking models. By definition, these banks will not act as full service banks and provide specific services. Consequently, the revenue generating potential will reduce. As a result, low cost structures with reliance on technology will be crucial for such banks. Regulations will need to shed the traditional mindset of control, and promote innovation to facilitate the success of differentiated banking.