The post-demonetisation cash crunch sent shock waves across the country, especially for businesses where a significant part of transactions were happening against physical currency—such as the money transfer and money changing businesses. While the former requires large reserves of money to pay to the recipients of inward remittances sent by their relatives abroad, the latter requires money to pay for foreign currencies surrendered by people who have returned from their trip abroad, which are generally within the RBI-permitted limit of ₹50,000. Small value forex sale transactions (below ₹50,000), which are generally paid for by cash, also fell dramatically as most people had no money in their hands.
One of the several benefits of demonetisation is the improved risk profile of money changers as well as people travelling abroad.
While the general public was standing in queues to access their own funds, cash-dependent businesses were finding it difficult to run operations. Even after more than two months of the announcement of demonetisation the situation is not completely back to normalcy due to the ceiling on permissible weekly withdrawals from bank accounts.
However, while much has been spoken about the troubles people had to undergo due to demonetisation, there are several upsides as well, the most important being the great push the move has given to electronic and digital transactions. The switchover from cash to electronic/digital modes of payment can improve the risk profile of the money changing business dramatically.
Reduces risk of theft
So far, transactions below ₹50,000 were largely happening against cash. This had necessitated the holding of large amounts of cash by money changers and money transfer agents. Owing to the unexpected cash crunch, smaller amounts are now also being paid by way of cheques, demand drafts, debit cards, credit cards etc. This has, for the first time, made it possible to do business without hoarding of cash, thereby reducing the risk of loss due to theft, burglary etc.
Reduces the TAT
In the business of forex, time is the most important factor as the exchange rates change very rapidly. Even a delay of a few hours may mean the cost of foreign currencies going up by several hundred rupees, affecting the average person who wants to buy forex to go abroad. Payment of above ₹50,000 for purchase of forex has to be made by cheque or RTGS, NEFT etc. which could take one or two days (for realisation of cheques) and a few hours in the case of RTGS or NEFT for registration of the beneficiary. By the time the amount reaches the money changer the exchange rate could move unfavourably and the customer could end up paying a higher rate for forex. Payment through credit/debit card involved transaction charges ranging from 1% to 2.25% which meant avoidable cost to the customer. Money changers would not absorb this cost as their margin was many times 1% or less. While instant payment through mobile wallet and IMPS was possible, the restriction on amount made them unsuitable for forex transactions.
UPI will make it possible for customers to make payments instantaneously and buy forex at the rates of their choice.
Post-demonetisation, banks as well as the government have started giving a big push to the new and highly secured digital way of making payments called Unified Payments Interface (UPI) through specially developed apps such as SBI Pay, Axis Pay, BHIM etc. As long as the merchant (in this case the money changer) has a Virtual Payment Address (VPA) the customer can instantly transfer an amount up to ₹1 lakh through the mobile app. As a significant percentage of transactions are for less than this amount, UPI will make it possible for customers to make payments instantaneously and buy forex at the rates of their choice.
Faster migration to forex prepaid cards
With people getting more and more accustomed to non-cash modes of payment domestically, we will soon witness travellers preferring to carry forex prepaid cards over currency notes. This would be a win-win situation for both the customers as well as money changers. If there is less cash, be it with money changers or with consumers, the risks automatically come down.
While talking about the impact of demonetisation, Nandan Nilekani, the former head of the Aadhaar project, said that “digital transactions will escalate considerably in the next three to six months to a rate that would otherwise have taken three to six years.” Let us hope his prediction comes true.
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