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Has demonetization led to higher digital payments?
Doubtful; ATM cash withdrawals back to pre-demonetization levels
19 June 2017
The Economy Observer
One of the key structural benefits expected from the historic demonetization announced in November 2016 was a shift
towards digital payments. However, the aggregate value of all transactions under electronic payment systems (EPS)
has failed to witness significant increase even six months post demonetization.
Further, while the value of transactions in retail digital modes (PoS, PPIs, IMPS and UPI) increased sharply in December
2016, it has stabilized at higher levels since then (up to May 2017). Similarly, while the volume of retail digital
transactions doubled by December 2016, there are no new net additions since then.
Finally, after falling by more than 60% in the last months of 2016, cash withdrawals from ATMs have moved back to
pre-demonetization levels. All these data points raise doubts over the desired structural shift towards digital payments
post demonetization.
Demonetization was seen as a boost to digital payments, since ~90% of transactions
were believed to be taking place in ‘cash’. Eventually, digitalization was expected to
help reduce tax evasion and corruption. However, available/estimated data up to
May 2017 raises doubts over the increased digitalization in the economy.
The total value of all
transactions under EPS
(electronic payment
system) has been broadly
unchanged since
demonetization, barring a
seasonal spike in March
2017
What do the aggregate numbers tell us?
One of the crudest ways to find out if digitalization has increased is to analyze the
aggregate value of transactions under electronic payments system (EPS) released on
weekly/monthly basis by the Reserve Bank of India (RBI). The total value of
transactions under EPS [consisting of eight (8) modes: Real Time Gross Settlement
(RTGS), National Electronic Funds Transfer (NEFT), Cheque Truncation System (CTS),
Immediate Payment Service (IMPS), National Automated Clearing House (NACH),
Unified Payments Interface (UPI), Debit/Credit Cards at Points of Sale (POS), and
Prepaid Payment Instruments (PPIs)) has been broadly unchanged since
demonetization
(Exhibit 1).
The spike in March 2017 could be explained as seasonal.
However, the volume of transactions has witnessed a durable increase
(Exhibit 2),
implying a significant fall in the value per transaction.
Exhibit 2:
… however, total volume of digital payments has
stabilized at higher level
1,600
1,200
800
400
Total volume of electronic payment systems (EPS)
(Unit m)
Exhibit 1:
Aggregate value of all digital payment transactions
didn’t witness any increase post demonetization…
200
150
100
50
(INR t)
0
May-11 May-12 May-13 May-14 May-15 May-16 May-17
Combined value of POS, PPIs, IMPS, RTGS, NEFT, UPI, CTS and NACH
Total value of electronic payment systems (EPS)
0
Jan-16
May-16
Sep-16
Jan-17
May-17
Source: Reserve Bank of India (RBI), CEIC, MoSL
Nikhil Gupta
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Madhurima Chowdhury
(Madhurima.Chowdhury@motilaloswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
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Exhibit 3:
Value of total transactions using various digital channels (INR b)
INRb
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
1
RTGS
82,660
86,728
122,784
86,459
95,526
106,101
96,016
98,592
110,564
97,554
101,894
11,0980
100,603
95,267
154,095
111,744
NEFT
7,087
7,279
10,226
8,325
7,733
8,815
8,145
8,764
9,880
9,505
8,808
11,538
11,355
10,878
16,295
12,156
CTS
5,546
5,601
6,929
6,258
5,785
5,734
5,717
5,925
5,737
5,974
5,419
6,812
6,618
5,994
8,063
6,991
IMPS
166
170
199
210
216
237
251
268
289
344
325
432
491
482
565
562
NACH
441
384
555
585
570
557
634
682
590
768
675
699
601
654
899
972
POS
1,2
PPIs
49
50
57
47
50
53
53
56
56
60
51
98
1
UPI
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1
7
17
19
24
22
Total
96,306
100,546
141,111
102,259
110,285
121,893
111,231
114,728
127,518
114,724
117,761
131,458
120,612
114,035
180,738
133,256
358
336
362
375
405
395
414
441
401
519
587
892
817
645
691
706
110
96
107
104
May-17
90,171
12,411
6,746
586
744
751
115
28
111,551
1
Extrapolated RBI’s representative data
2
Debit + Credit cards usage at POS machines; RTGS = Real Time Gross Settlement; NEFT = National Electronic Funds Transfer;
CTS = Cheque Truncation System; IMPS = Immediate Payment Services; NACH = National Automated Clearing House; POS = Point Of Sale;
PPI = Prepaid payment instrument; UPI = Unified payment instrument
Source: Reserve Bank of India (RBI), CEIC, Compiled by MoSL
19 June 2017
2

Value of digital retail
transactions
#
has stabilized at higher level…
The aggregate value of
consumer digital
transactions has been
broadly unchanged in the
past six months
The total value of digital retail transactions (from four modes –POS, PPIs, IMPS and
UPI) increased from less than INR500b in mid-2015 to ~INR750b by August 2016 –
implying a growth of more than 50%
(Exhibit 4).
With high-value note ban in
November 2016, retail digital transactions got a one-time boost in December 2016
and crossed INR1,400b. However, the aggregate value of transactions has stagnated
since then, with total value at INR1,479b in May 2017
(Exhibit 5).
Exhibit 5:
… however, total value has stabilized at higher
level since then
1,000
750
500
250
0
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Source: Reserve Bank of India (RBI), CEIC, MoSL
(Unit m)
POS
PPIs
IMPS
UPI
Exhibit 4:
Retail digital payments
got a one-time exceptional
boost immediately post demonetization…
1,500
1,200
900
600
300
0
May-11 May-12 May-13 May-14 May-15 May-16 May-17
* Aggregate value of POS, PPIs, IMPS and UPI
(INR b)
Total value of digital transactions*
With cash crunch easing
post-December 2016, there
has not been any net
addition to total volume of
transactions on country-
wide basis
…and the volume has stagnated after doubling by December 2016
Similarly, total number of transactions (txn) almost trebled from 300m in mid-2016
to its peak of 847m in December 2016. In May 2017, total transactions are
estimated to be 830m
(Exhibit 6).
It implies that with cash crunch easing post-
December 2016, there has not been any net addition to total volume of transactions
on country-wide basis.
A look at the four modes of digital transactions covered in this study reveals that
PPIs (including mobile wallets such as Paytm, MobiKwik, etc) have witnessed the
highest growth in business
(Exhibit 6).
While POS and IMPS transactions increased
70% and 58% since November 2016, PPI transactions increased by ~190%. In other
words, PPI transactions, which were less than half of POS transactions pre-
demonetization, were 94% of POS transactions in April-May 2017.
Exhibit 6:
Total number of transactions struggling to increase
above 850m…
1,000
800
600
400
200
0
Sep-16
Nov-16
Jan-17
Mar-17
May-17
(Unit m)
POS
PPIs
IMPS
UPI
Exhibit 7:
…however, PPIs have seen their business growing
multi-fold
600
450
300
150
0
Jan-16
May-16
Sep-16
Jan-17
May-17
Source: RBI, MoSL
(Jan'16=100)
POS
PPIs
IMPS
#
All other modes such as RTGS, NEFT, CTS and NACH include corporate/interbank transactions rather than retail transactions
3
19 June 2017

Value per transaction also stable at lower level
PPIs received a huge boost because of small-value transactions. While PPI
transactions were 94% of POS transactions, the value of PPI transactions was only
15% of the value of POS transactions in 2017 – not significantly different from pre-
demonetization period. Not surprisingly then, the value per transaction for PPIs
almost halved from INR600/txn in the pre-demonetization period to about
INR300/txn now. On the other hand, while the value/txn for cards usage (at POS)
was broadly unchanged, it increased marginally for IMPS. On aggregate basis, the
value/txn has fallen from INR2,200 in the pre-demonetization to about INR1,800/txn
during demonetization and has stayed there in 2017
(Exhibit 8).
Moreover, the value of transactions per day has also been broadly unchanged at the
higher level in the past six months
(Exhibit 9).
Exhibit 8:
The amount per retail transaction has stabilized at
lower level since demonetization…
2,500
2,300
2,100
30
1,900
1,700
1,500
Jan-16
May-16
Sep-16
Jan-17
May-17
Aggregate value of POS, PPIs, IMPS and UPI
(INR)
15
0
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Source: RBI, CEIC, MoSL
Value per retail transaction
Exhibit 9:
…and value of transactions per day has also been
broadly unchanged
60
45
(INR b/day)
POS
PPIs
IMPS
UPI
ATM cash withdrawals back to pre-demonetization level
Although the value and number of digital transactions have remained broadly
unchanged over the past six months, the amount of cash withdrawals from
Automated Teller Machines (ATMs) has converged with the pre-demonetization
period.
With cash crunch easing,
ATM cash withdrawal has
moved back to INR72b per
day, matching the pre-
demonetization levels
As high-denomination currency notes ceased to be legal tender, ATMs dried across
the country. Not surprisingly then, the amount of ATM cash withdrawals fell from
more than INR70b per day before demonetization to only INR27b in December
2016. Nevertheless, with cash crunch easing, ATM cash withdrawal has moved back
to INR72b per day, matching the pre-demonetization levels
(Exhibit 10).
Further,
with policy makers capping the cash withdrawal at INR2,000 per transaction, after
dipping towards INR1,348/txn, the amount of ATM cash withdrawal has crossed
INR3,000/txn – similar to pre-demonetization level
(Exhibit 11).
19 June 2017
4

Exhibit 10:
ATM cash withdrawals per day back to pre-
demonetization levels…
100
80
60
40
20
0
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Using debit and credit cards
(INR b)
ATM withdrawals per day
Exhibit 11:
…same as the amount of ATM withdrawal per
transaction
4,000
3,250
2,500
1,750
1,000
(INR)
ATM withdrawals per txn
Source: RBI, MoSL
Is the share of non-cash transactions falling?
Although the amount of
digital transactions almost
doubled during the
demonetization period,
they have remained broadly
unchanged in 2017, which
questions the structural
shift towards higher
digitization in the economy
Ideally, with a movement as historic as demonetization, only a consistent increase in
digital transactions would have pointed towards its success. Although the amount of
digital transactions almost doubled during the demonetization period (our database
is not exhaustive), they have remained broadly unchanged in 2017, which questions
the structural shift towards higher digitization in the economy. With the economic
activity actually rising every month in nominal terms (barring seasonal variation),
the share of digital transactions – as measured by the three modes covered in our
study – peaked out in December 2016.
We look at the aggregate value of digital transactions by these three modes in
comparison to nominal GDP
(Exhibit12).
Due to demonetization, the share of digital
transactions increased from 0.51% in GDP in 2QFY17 (quarter ending September
2016) to 0.93% in 3QFY17 but eased to 0.82% in 4QFY17.
One could argue that even 0.82% is much higher than what it would have been
without demonetization; however, considering such low base and the extent of the
historic movement, we believe that the fall in the share of digitization (using limited
database) so early is not encouraging.
Due to demonetization, the
share of digital transactions
increased from 0.51% in
GDP in 2QFY17 to 0.93% in
3QFY17 but eased to 0.82%
in 4QFY17
Exhibit 12: Share of retail digital payments* in final consumption expenditure (%)
1.0
0.8
0.6
0.4
0.2 0.2
0.0
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
* Aggregate value of POS, PPIs, IMPS and UPI
Source: RBI, CEIC, MoSL
0.2
0.1
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.3
0.3
0.3
0.4
0.4
0.4
0.5
0.5
(%)
Digital transaction/Annualised nominal GDP
0.9
0.8
0.2
0.3
19 June 2017
5

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