Why Cash is still King in India

Recently, I was associated with the launch of India's first white-labeled ATM (Indicash)... these are ATMs that do not carry any bank branding and are owned/operated by non-banking companies. One of the questions that came up from several people was, does India need more ATMs? Shouldn't the country be leap-frogging towards e-payments and m-payments? Aren't ATMs / cash the legacy "technology" in payments and transaction processing?

I can use a lot of benchmarks to show how India lags all major developed economies and even several emerging economies when it comes to banking and ATM penetration. Even countries where many people carry no cash in their wallets have more ATMs than India does. But let me illustrate my point (and the serious problem we face) through a simple example.

One of my several monthly cash expenses is towards purchasing milk. The vendor delivers 2-litres of packaged milk every morning and I pay him about Rs 2000 every month. I estimate that he has at least 100 other similar deliveries in my society complex. Therefore, he collects over Rs 200,000 monthly or nearly Rs 25 Lakhs (2.5 million) annually. However, his margin is probably only about 3-4%, i.e. Rs 100,000 p.a. 

Imagine if all the society residents decided to pay him using m-payment or cheque or credit card -- any transaction mechanism other than cash. His collection would now get into a bank account and therefore, "accountable". He will have to figure out what his tax liabilities are. Maybe he will need a Chartered Accountant to track his business income and prepare his returns. It is likely that he will eventually have no income tax liabilities but does he want to take a chance? It is the paper-work, the fear of extra hassles and possible bribe demands that makes him prefer cash any day.

Now take your grocery vendor. And your fruit and vegetable vendor. And many other local service providers. Every month, you make thousands in cash payments because the recipients will not have it any other way. In turn, they spend on housing, food and transport only in cash. 


I am not ruling out the importance of electronic / mobile transactions in India - it's a huge opportunity. But as long as there is a very large black (cash) economy out there and most small businesses are vary of the bureaucracy involved in becoming "white", we will have to make the frequent trip to the neighbourhood ATM.


Disclosure: I am associated with some companies in the payments / transaction processing business as an Advisor / Director.

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5 responses
I agree Srini. In fact, in the founding years of my career, I was associated with a mobile payment company in India. One of the most innovative companies in the world wanted to launch their mobile money manager B2B product in India and wanted to use us as the payment instrument. So alongwith their head of alliances, scouted the Mumbai market for 45 days, speaking with vendors, distributors, shopkeepers across categories. We showcased our product, how it made life easy for them etc . While most of them agreed on the utility of the product and were willing to pay a small subscription fee, they upfront said that they will not take it as transactions will be trackable. Some were open enough to say that they dont want anyone to know how much they are earning. And this was in 2006 ! So, evidently "black market" will always rule this country
— Rohan
I have seen a sea-change of attitude among small business owners in Pune after the introduction of Local Body Tax (LBT) replacing the cash (bribe?) oriented Octroi. Now the vendors are more amenable to accept bank transactions as they anyway need to account for their purchase and sale. When I refurbished my house recently I was ready to withdraw a bundle from the bank but the architect stopped me saying they will have to submit bills anyway. I feel this is a very good trend and while painful in the short term (PMC suffered a loss of 185 crore in six months of LBT collections vs Octroi in same period last year), but sticking to accountable trades will deliver gains to society in the long term. I got my milkman to accept a cheque every month and I think my wife already convinced the maid to open a bank account. The logic for them is very simple - what goes in the bank is savings and cash lying around in the house is fair game for spending.
— F J Bandukwala
Dear Mr. Bandukwala, This is a great thought from your part, will try to emulate you :) Also, with traders now more amenable to accepting trackable financial instruments is borne out of the government change in policies, so will it be fair to say that the its more reactive and not proactive? At least part of their incomes are now getting tracked ! its a start
— Rohan
Well said! And I feel cash will continue to be king till the time banking facilities become hassle free for the lower strata. Very often, the vendors, maids, labourers do not have bank accounts. I have had numerous instances of maids wanting to safekeep a part of their earning with me. At the mention of bank, they have launched into a tirade of issues. A lot of them are uneducated and have relocated from villages. They don't have the necessary documentation to open a bank account. Add to that the daunting task of having so many forms filled by someone and they are happy to keep their money with themselves! Till these guys deal in cash, cash will continue to be king...
— Ankita
Rohan, Ankita: Thanks; agree about the current assessment, but I hope it will change. Some of the later comments suggest that small changes are happening. This is an interesting article: http://www.dailypioneer.com/columnists/oped/sma... FJB: Wonderful, it is great to hear about your initiative. We should all try to emulate :)
— Srinivasa Addepalli