Digital Economy, Cashlessness and Access to Credit: Case Studies of India and Kenya

As noted above, India has rapidly increased the proportion of the adult population with access to bank account within the last five years. This was possible largely due to a government supported financial inclusion program known as Jan Dhan Yojana (JDY) which has opened nearly 320 million new bank accounts starting in 2014. As bank account coverage became almost universal, the announcement of demonetization (banning of high-denomination currency notes) in November 2016 forced citizens to move towards formal banking channels and use digital cashless payments, especially through mobile phones.

India has an elaborate system of social safety net, including monetary transfers, administered both by the federal and state governments. These have long been plagued by mismanagement, corruption and “leakage” – the phenomenon of public funds that never reached intended recipients, or were diverted to fictitious (ghost) beneficiaries, benefitting corrupt officials and politicians. With the rollout of India’s biometric ID system, Aadhaar, and opening bank accounts through the Jan Dhan Yojana (JDY) – as well as linking the two – the government moved towards a system of digital payments for beneficiaries of public subsidies and transfers known as the Direct Benefit Transfer (DBT) scheme. This policy preceded demonetization, but the latter gave a boost to the coverage of DBT across the country.

Bhamro Bai, a widow, lives in a mud hut without electricity or clean drinking water in Mahendwara village in the northern state of Rajasthan. The village, located in Karauli district, is a collection of farming families, landless agricultural labor and men who commute to nearby towns for daily wage work as well as migrants to larger cities such as Jaipur and Delhi to work mainly in construction sites. Karauli is also on a national list of poor districts and therefore has a multitude of government funded poverty alleviation programs, including old-age and widow pensions, house building, public works and provision of LPG cooking gas. Bhamro Bai is illiterate with no record of birth but remembers historic events such as India’s independence and the visit of Prime Minister Nehru to the nearby town. This qualifies her to receive both an old-age and widow pension amounting to around $20 per month, which is her only source of income. Being destitute, she is also entitled to receive a monthly ration of 25 kilograms of wheat and pulses from the Public Distribution System (PDS) at Rs.1 per kilogram which is paid in cash to the PDS shopowner. She lives on the margins of society with no family to depend on but her neighbors pitch in to support when she needs financial or medical help.

Until 2014, Bhamro Bai used to receive her pension in cash delivered by the postman. It was a convenient system, although the pension would often be delayed or be distributed once every two months in lumpsum and the postman (unofficially) expected a payment for his services. There are nearly 2 million old-age and widow pension recipients in the state, but it was common knowledge that many of them had passed away, resulting in “leakage” of public funds. Following the rollout of Aadhaar and JDY, the government of Rajasthan decided to digitize pension payments – first requiring every beneficiary to register with their biometric ID, open a bank account and link the two. Every enrollee was then issued a uniquely numbered card (different from Aadhaar) which held the details of the beneficiary, including their bank account and mobile phone information. It listed all programs that Bhamro Bai was entitled to, including pensions and food rations – with the caveat that access to these programs are now digitally mediated, either through electronic transfers to bank accounts (pensions) or biometric authentication (food rations).

Photos by Anit Mukherjee

Figure 1: Bhamro Bai (left) and Vimla Devi, Mahendwada village, Karauli District, Rajasthan, India

For Bhamro Bai, this compulsory move towards cashless delivery of her pension presents a particular challenge. Apart from being physically infirm, she is digitally excluded – someone who is not able to transact using digital technology. She depends on ‘digital translators’ – family and friends who act in good faith to convey information on whether her pension has been transferred to her bank account, and if so, help her withdraw cash to cover her expenses, not least to pay for her food rations. From a convenience point of view, her experience is neutral – previously she was dependent on the postman to get her money, now she depends on her social network to help her navigate the cashless economy.

It is interesting to compare Bhamro Bai’s experience with the cashless digital world with that of her neighbour, Vimla Devi, 45, married to a migrant worker and a mother of two teenage daughters with a brother living close by. Vimla Devi dropped out of school when she was ten but ensures that both her daughters go to school (a private fee-paying one because the local government school is “not good”). In the absence of her husband, she tends to her two-acre plot of land growing vegetables and pulses to sell in the local market. She receives a yearly credit from the government to buy seeds, joins other villagers to work in a public works project during the lean season and gets a subsidy to refill her LPG gas cylinder – something that she obtained recently through a government program to provide poor women like Vimla Devi with clean cooking fuel.

While being functionally illiterate, Vimla Devi can sign her name and recognize numbers. She opened a bank account several years ago to receive the agricultural credit and uses the same account to receive her other transfers from the government – which over time have all become digitized. Her husband, the migrant worker, used to bring money in physical cash when he would visit the village twice a year. However, through the financial inclusion drive of the government (JDY), he managed to open a bank account in the city where he works. He also has a mobile phone and gave Vimla Devi an old one as a present recently, so that he could communicate with his family, especially his daughters, when he was away. Needless to say, the daughters use the phone more than the mother, but it is a shared asset that brings the family closer together. More importantly, now her husband could transfer money more regularly, especially to pay for their daughters’ school fees. Although Vimla Devi needs to seek her brother’s help to take her to the bank branch to encash her benefits and remittances, she is in a better position than Bhamro Bai to take advantage of the new, more digital financial world.

This is the setting for India’s demonetization, a decision that affected the lives of millions of people like Bhamro Bai, Vimla Devi and her family. In November 2016, the Government of India banned high-value currency notes (Rs.500 and Rs.1000, approx. $8 and $16) currently in circulation until new notes were printed and distributed. This unprecedented decision, ostensibly to address the problem of unaccounted for or ‘black money’, rendered almost all cash held by people worthless overnight. People with cash holdings had to deposit them in bank accounts within a stipulated period, with strict daily withdrawal limits and penalties for non-compliance. Being a heavily cash-dependent economy, there was no alternative to people changing their behaviour and move to alternative modes of transaction, especially through digital means.

The data on financial transactions support this hypothesis, but only for a short period. In the immediate aftermath of the ‘demonetization shock’, transactions using mobile banking and point-of-sale (POS) experienced sharp increases. However, the volume and value of mobile banking and POS transactions fell significantly from their peak in December 2016 within three months, as the circulation of new currency notes began to pick up. By April 2017, digital cashless transactions resumed their regular trend, without any discernible long-term impact of demonetization (Mukherjee and Wadhwa, 2017).

The quick reversion to business-as-usual signals that people, including our protagonists, were not ready to give up cash. There are significant costs, both implicit and explicit, that is associated with a move to a cashless environment. For retail merchants especially in the informal sector, this means a greater degree of formalization and transparency in their sources of income, which reduces their chances of evading taxes. Consumers on the other hand have to transition to a new technology platform which may not be easy especially for the poor and the marginalized. India’s experience shows that a behavioral shift to digital finance cannot be coerced, but requires gradual improvements in financial literacy and formalization of the economy.  The bank-led financial inclusion model that India has adopted may be one reason for the default transaction mode to be more in the nature of cash and near-cash instruments (cheques, demand drafts etc.) than a radical shift to digital payments. In this context, the experience of Kenya can be instructive, as we shall explore in the next section.