A fundamental shift is under way in payment habits of the Indian economy, said a RBI document that looked at the impact of demonetisation.

RBI’s interventions on promoting electronic modes of payment appear to have facilitated a reduction in the usage of paper-based instruments, such as cheques, said the Mint Street Memo “From Cash to Non-cash and Cheque to Digital: The Unfolding Revolution in India’s Payment Systems”.

“Demonetisation impacted the inter-bank payment and settlement systems significantly in moving cash transactions to non-cash modes of payments in three segments, viz., retail electronic payments, card usage at POS terminals and cheques. The increased usage of these three instruments during the demonetisation period has been sustained in the post-demonetisation period as well, suggestive of a fundamental shift being underway in payment habits of the Indian economy,” said the RBI document prepared by Sasanka Sekhar Maiti who works as assistant adviser, department of statistics and information management of the RBI.

It said that within the ambit of inter-bank payment and settlement systems, paper based inter-bank cheque clearing system is the oldest non-cash mode, albeit with the highest settlement time lag and inherent credit and liquidity risks. Therefore, the RBI has attempted to reduce the usage of cheques and facilitate increased usage of electronic payments.

The RBI has intervened to reduce the usage of paper-based instruments on several dimensions. Effective April 1, 2008 it mandated the use of electronic modes of payment for Rs 10 million and above in regulated markets and by regulated entities, which was further reduced to Rs 1 million with effect from August 1, 2008.

The cap on service charges for electronic payment products and for outstation cheque collection that was prescribed since October 8, 2008, incentivised migration to alternate modes, viz., Real Time Gross Settlement (RTGS), National Electronic Fund Transfer (NEFT) and Electronic Clearing Service (ECS) transactions by bank customers. In the NEFT system, a recent policy intervention has been the introduction of more settlement batches in a business day by shortening the settlement duration between batches, it said.

The memo said that for card transactions, various policy initiatives have been undertaken to enhance security measures through introduction of additional factor of authentication (AFA), separating merchant discount rates for debit and credit cards, and relaxing the AFA requirement for transactions up to Rs 2000.

The latest technology implemented in cheque clearing system is cheque truncation system (CTS). Retail electronic payment systems, viz., National Automated Clearing House (NACH), Immediate Payment Service (IMPS) and Unified Payments Interface (UPI) have also been set up.

In the RTGS system, a major policy change has been the introduction of minimum threshold value for customer transactions, presently at Rs 0.2 million. Furthermore, the RBI has introduced service charges for direct participants in RTGS, including time varying tariffs and extending business hours to align them with market timings.

Even as retail payment systems, card transactions at POS, and the RTGS system have been growing steadily, cheque volumes and values have shrunk from 2008-2009 to 2016-2017 except for 2012-2013 in value terms and 2016-2017 in volume terms

The payment systems data have been grouped into three time buckets, viz., pre-demonetisation period from April 2016 to October 2016; demonetisation period from November 2016 to March 2017; and post-demonetisation period from April 2017 to August 2017. Cheque volumes and values contracted during the pre-demonetisation period but recorded positive growth during demonetisation as well as post-demonetisation period. There was a sharp growth in card transactions at Point of Sale (POS) for both demonetisation and post-demonetisation periods.

The average monthly volumes and values in retail electronic payment systems and card payments at POS terminals were significantly higher during the demonetisation period than in the pre-demonetisation period and were equal for the demonetisation and post-demonetisation period. This implies that the sudden increase in the usage of retail electronic payment systems and cards at POS terminals during demonetisation persisted in the post-demonetisation period.

The RBI document said that the average monthly volume of cheques during the demonetisation period was significantly higher than the pre-demonetisation period but was equal during demonetisation and post-demonetisation. However, the average monthly value of cheques was equal for all the time buckets. This implies that during the demonetisation period, there was a sudden increase in cheque volume, though cheque values did not increase significantly, suggesting that a large amount of small value cash transactions moved to non-cash mode of payments through cheques. The increased volume of cheques is sustained in the post-demonetisation period.

The average monthly volume and value for the RTGS system were equal for pre-demonetisation and demonetisation periods. They are also equal for the demonetisation and post-demonetisation periods. This implies that there was no significant impact on the RTGS system during demonetisation. However, the significant increase during the post-demonetisation period over the pre-demonetisation period is indicative of the rising popularity of the RTGS system for high value transactions.