Budget 2023: FM must aim to strengthen banking infra to support economic growth, inclusion
India’s financial sector has emerged more resilient and robust after the debilitating pandemic. The government’s gigantic task to ensure financial services from formal sources is easily accessible to every household which inspires confidence.
Both–bank branches and automated teller machines (ATMs), are playing a crucial role in banking coverage expansion in India and has a significant impact on financial inclusion. Without the existence of a full-fledged brick-and-mortar branch, ATMs also play an important role by providing basic banking services.
India’s poor ATM record against global average
Being the world’s third-largest ATM market after China and US, India is still significantly under-penetrated with only 22 ATMs per 100K population compared to a global average of 47 with US and China being at 123 and 97 respectively.
To strengthen the formal banking system in India, various reforms including Goods and Service Tax (GST) are enabling growth and development. Over the last two years, despite the pandemic-related economic disruptions, cash logistics companies have continued to play a critical role to ensure people and businesses always had access to cash. These companies have not only ensured wider financial inclusion, but the need to reach the last mile of India’s geography additionally contributes to strong job creation across workforce segments.
Cash in circulation in the Indian economy saw an 83 percent rise to about Rs 32.4 lakh crore as of December 23, 2022, which coincides with an increase in credit and financial inclusion of micro, small and medium entrepreneurs (MSMEs) in the country. Bank credit increased 17.2 percent YoY to Rs 129.48 trillion as of November 18, 2022, suggesting a strong demand for loans in the future. This upcycle is likely to stimulate economic expansion, and infrastructure expenditures, including bank branches and ATMs.
mATM deployment outpace growth in cards
On the ATM side too, micro-ATMs (mATM) deployment continued to outpace the growth in cards, PPIs, and ATMs in FY22. Even on a high base of 49 percent year-on-year growth in FY21, mATM deployment grew by a strong 93 percent in FY22, followed by prepaid cards at 45 percent. The Reserve Bank of India (RBI)’s enabling cardless cash withdrawal from ATMs is another sign of the maturity and safety of today’s cash logistics ecosystem.
It would be timely and extremely helpful if the upcoming Budget brings in a few supporting measures to encourage wider access to financial services.
Improve ATM penetration
There is a need to address the pent-up demand of ATM base for the PMJDY account holders and the beneficiaries of the direct benefit transfer program. To achieve an ATM penetration of 50 per lakh people, there is a large headroom for the growth of ATM deployments in our country. This increase in the density of ATMs will not only provide wider access to more people, but will also provide deeper access to more financial services.
While private-sector banks are expanding their branch networks to support India’s economic growth, they lack presence in certain geographies such as rural locations. This landscape can be bridged by public-sector banks to support small businesses and provide last-mile banking access. Additionally, a wider ATM network will also provide a boost to digital banking march through Digital Banking Units being set up for delivering digital banking products and services as well as servicing existing financial products in both self-service and assisted mode.
Increase in interchange fee
To address the needs of the rising cost of deployment and expenses for ATM maintenance, the financial transactions fee was increased after 7 years in 2021 by 13 percent to Rs. 17. While this CAGR of 1.8 percent was a respite for the banking industry, stress continued due to the increasing operating costs and the costs of compliance. With the combined CPI CAGR at 4.8 percent in the same period to match inflation, the interchange fee for financial transactions should have gone up from Rs 15 to Rs 21.
An increase in interchange fees could further accelerate ATM deployment by banks and address the potential need for an increase in ATM density. This would also encourage ATM operators to expand into semi-urban and rural areas and help the RBI and government achieve their financial inclusion goals. A hike in the interchange fee also creates a compelling case for adhering to compliance guidelines outlined by RBI.
New avenues for credit, financial inclusion reforms needed
This sector is a key enabler to financial inclusion and growth – by offering a full suite of cash logistics and technology solutions. Companies specialising in cash logistics services have a deep network that intersperse with cities, towns, talukas, and districts. This accessibility helps companies achieve targets set to reduce economic disparities, provide easy access to financial platforms, and fuel the ambitions of the people of our country.
The banking infrastructure is projected to grow at 6 percent CAGR, accompanied by increasing formal financial inclusion initiatives. There is a large informal sector in India that still needs to come into this formal fold. In this respect, Budget 2023 can bring in more cash-flow-based lending programs such as Open Credit Enablement Network (OCEN), and introduce new avenues for credit and financial inclusion reforms.
Incentives such as a reduction in GST to provide a last-mile delivery ecosystem in the form of micro-ATMs, deployment of business correspondents, or even verification of KYC norms will positively drive the financial inclusion movement in India.
Today, both the demand and supply sides are expanding at a large scale and further building a financially inclusive society. Additionally, new technologies have made it easier for people to access their basic banking needs. We believe sustained growth in bank branches and ATM networks in the formal banking infrastructure will have a significant impact on financial inclusion in India.
The writer is Executive Vice Chairman, Chief Executive Officer and Whole Time Director, CMS Info Systems Ltd. He tweets @kaulrajiv Views expressed are personal.
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