Demonetization and digital transactions

As an individual, we spent money digitally in shopping online, grocery shopping, sending money to friends and family. Withdrawal of money from ATM is counted as the last digital transaction before the money withdrawn is spent. We can track our expenses by analyzing our digital transactions. If we can combine all the digital transactions from all the users in a country, we can look into the financial standing of a country and can also predict what may possibly happen in it’s financial future. Based on the way money is transferred from one account to another, there are different type of transactions. As an everyday user of online banking, you might already be familiar with the term such as IMPS, NEFT, and RTGS. With the introduction of mobile banking, mobile transactions are also getting popular everyday. Apart from these transactions, some of you might have also heard about ECS transactions.

November 8, 2016 will be remembered as a historic day in Indian History. On this day, Indian government declared their existing currency of Rs 500 and Rs 2000 banknotes invalid. Residents of India were given 50 days to deposit their old currency in banks. Following the announcements, the situation became chaotic in India as people lined outside banks to exchange their old currency. Many inhumane incidents came to light and people lost their lives. Some died in queues while waiting for their turn and some other in hospitals due to denial of old currency irrespective of the government order. After the announcement of demonetization, Indian government claimed that it was being done to reduce counterfeit cash used in illegal activities and terrorism (ref).

While demonetization was in process, people who were equipped with credit/debit cards, did not face major problems. Though it was not included in the main agenda, as days passed, government started claiming that demonetization will help in promoting digital transactions. People in urban areas with credit/debit cards faced less problems. Uselessness of digital transactions hit rural areas the most as people were using their debit/credit cards to withdraw cash from ATM which they later spent in daily activities. There were long queues outside ATMs and cash withdrawal limit was limited to Rs 2,000. Rural India simply did not have enough infrastructure to support digital transactions. In other words, I can say that there were not enough e-pos machines, a payment machine used in any shop. Lack of machines clearly showed that digital transactions were not the top-most priority of the government. With time, government and other agencies started procuring e-pos machines in bulk, but demonetization was already in progress and it was impossible to deliver e-pos machines the next day.
After a huge chaos, things started settling down and people began to forget what they had been through. E-pos machines that were ordered in haste must have been delivered in a few months and I believe the frequency of digital transactions boosted post demonetization. We really can’t say much about this claim unless we look at the data related to digital transactions which is available for download at Before we look into numbers, we need to understand the type of digital transactions. Following paragraphs give a brief introduction to the different types of digital transactions and their performance since Jan 2014.

NEFT Transactions

National Electronic Fund Transfer (NEFT) system was introduced in Nov 2005 which was formerly known as Electronic Fund Transfer (EFT) that was introduced in 1990. It transfers funds from one account of an individual (or corporate) to another electronically. Funds transferred as NEFT almost happen in real-time and take place during bank operating hours. We all transfer funds to our friends and family via NEFT transactions. Let’s have a look at the number of NEFT transactions and their volume since Jan 2014.

Number of total (credit + debit) NEFT transactions
Total (credit + debit) value of NEFT transactions

Number of NEFT transactions and their values have been rising continuously even before 2014. Post demonetization, neither the number of NEFT transactions nor their values show a significant change or jump. The month demonetization was being implemented i.e. Nov 2016, number of NEFT transactions actually went down compared to the previous month. In the following months, number of transactions and their values went up. This does not seem to have an impact of demonetization as similar patterns can be observed in previous months.

Normalized (w.r.t. Jan 2014) number of NEFT transactions and their values

When number of NEFT transactions and their values are normalized with respect to the values in Jan 2014, the trend is different. 2014 onwards, rise in NEFT values was higher than the number of NEFT transactions. Both did not go together. People were transferring more sums of money in less number of NEFT transactions. There can be two major reasons for this behaviour. Either people kept spending more for the same number of transactions (which means price rise and the gap between NEFT transaction and value further widened after demonetization) or they were transferring money and using it in mobile transactions as mobile transactions are continuously rising post 2015.

Mobile Transactions

In Oct 2008, RBI introduced mobile banking system. It permitted licensed and supervised banks which had physical presence in India to offer mobile banking. Customers could transfer funds from one account to another (in the same bank or another) through mobile banking system.

Number of total (credit + debit) Mobile transactions
Total (credit + debit) value of Mobile transactions

Mobile transactions existed in India for a while and they started boosting only after Jan 2015. Though Reliance launched Mobile Banking Services with SBI in Jan 2013, it was mainly targeting consumers on GSM network. Mobile transactions in India increased in 2015 when 11 companies received in-principle approval from RBI to set-up “Payment Banks” under the guidelines for Licencing of Payment Banks. PayTm, Jio, Airtel, Aditya Birla, India Post, Fino, and NSDL Payment Banks are continuously boosting mobile transactions.

Normalized (w.r.t. Jan 2014) number of Mobile transactions and their values

If we look at the trend of mobile transaction numbers and values, a peak is missing from the months around demonetization which occurred on Nov 8, 2016. There was a slight jump in the months of Nov and Dec 2016, but it cannot be differentiated from past trends. On the contrary, mobile transactions became more volatile (+ and -) after demonetization. Government guidelines of making AADHAR card mandatory for mobile banking also affected the mobile banking transactions.

To conclude, if you ask whether demonetization helped in boosting mobile transactions, my answer would be NO because there is no significant jump in mobile transactions post demonetization.

RTGS Transactions

Real Time Gross Settlement (RTGS) which was introduced in 2004 is a fund transfer system where money is transferred from one account to another in real-time. Transaction is settled on a one to one basis without wait or bouncing/netting with respect to any other transaction. RTGS transactions are typically used for high value transfers and minimum transfer limit set by RBI is Rs 2 lakhs.

Number of total (credit + debit) RTGS transactions
Total (credit + debit) value of RTGS transactions
Normalized (w.r.t. Jan 2014) number of RTGS transactions and their values

Data shows that the number of RTGS transactions and their values are unaffected by demonetization. Other than local ups and downs, both the numbers and values are rising slowly and steadily. Compared to Jan 2014, the number of RTGS transactions and their values are following a similar ratio.

ECS Transactions

Electronic Clearing Services (ECS) scheme was launched in 1990s to handle bulk and repetitive transactions (such as salary, interest, dividend etc.) of corporates and institutions. It can be said that ECS transactions represent the number of people who are on payroll and receive a regular income. ECS (Credit) facilitates customer accounts to be credited on a specific date. ECS (debit) was introduced to provide a faster method for periodic and repetitive collections of utility companies. This helps consumers/subscribers of utility companies in making routine and repetitive payments by “mandating” bank branches to debit their accounts and pass on money to the companies.

Number of total (credit + debit) ECS transactions
Total (credit + debit) value of ECS transactions

Number of ECS transactions shown in above graphs represent the total (debit + credit) number of transactions and their values. It is clear from the graphs that demonetization did not impact ECS transactions at all. This pattern makes sense as ECS transactions were not in the scope of boosting digital transactions. Demonetization might have affected people on a daily wage but they are not counted here as they receive their payments in cash and auto-credit for daily labourers is not enforced by the government.

Besides the story of demonetization and digital transactions, ECS transactions are narrating another tale of employment. Both the number of ECS transactions and their values are continuously declining. They hit a minimum score in the second quarter of 2016. This implies that the number of people on payroll is declining every month as they are losing their jobs. As a result, their interest rate is also diminishing which is counted as a part of ECS transactions. Further loss of jobs leads to a lower number of auto debit payments. Unemployment can be the only reason behind the decline in the number of ECS transactions and their values.

Normalized (w.r.t. Jan 2014) number of ECS transactions and their values

An argument can be made that if some people are losing jobs, some others are also getting paid a huge salary. This is not the case here. When the number of ECS transactions and their values are normalized with respect to the values in Jan 2014, both the number of ECS transactions and their values followed a similar pattern. This means that the amount of money transferred to employees went down as they lost jobs due to an economic crisis.

According to a National Sample Survey Office (NSSO) survey, unemployment rate in India is the highest in 45 years. ECS transactions hit a low mark in May – June 2016 and according to the  survey data conducted between Jul 2017 and Jun 2018, unemployment rate stood at 6.1%, higher than the previous high point from 1972-73.

Total Digital Transactions

If we add up different types of digital transactions, it gives a broader picture of the number and volume of digital transactions in India.

Total number (credit + debit) of digital transactions

As shown, the number of RTGS and ECS transactions is lower than the number of NEFT and mobile transactions. This might be due to the reason that RTGS transactions are used to transfer more than Rs 2 lakhs and ECS transactions occur only on regular intervals (in most cases monthly). NEFT transactions are used to transfer funds from one account to another and one user may transfer funds multiple times in a day. After 2015, the number of mobile transactions started increasing and slowly their number became equal to the number of NEFT transactions in July 2018.

Total value (credit + debit) of digital transactions

As RTGS transactions are used to transfer a large amount of money, value of RTGS transactions lies at top of the graphs. ECS transactions are used to transfer salaries, interests, and dividends, as such, their total value lies at the bottom. NEFT transactions stand second in terms of value transferred and mobile transactions rank third. Although the number of mobile transactions reached a value equal (and probably surpassed) to the number of NEFT transactions, their value remain lower than NEFT values. There are two possible reasons for this observation, 1) money transferred via NEFT transactions was used in mobile transactions, and 2) mobile transactions were used for transactions involving a smaller amount.

Normalized (w.r.t. Jan 2014) number of total digital transactions and their values

Shown above is the final and most interesting plot in the series of digital transactions. In contrast to the government claim post demonetization, digital transactions remained unaffected by demonetization. Demonetization failed to bring a boost in digital transactions. Lack of infrastructure and awareness can be the major reasons behind people going back to their old habit of using cash for daily transactions after a minor shock. A report says that, in Mar 2018, cash circulation reached to pre-demonetization level.

When we look at the number of total digital transactions and their values normalized with respect to the values in Jan 2014, total number of transactions grew more than 4 times whereas their values remained unchanged. In Aug 2018, there were 4.6 times the number of digital transactions worth 1.13 times their value in comparison to the values in Jan 2014. This means that the amount of money spent for a single transaction in Jan 2014 is being spent in 4.6 transactions in Aug 2018. This is a good sign for digital transactions. But demonetization failed to make any impact on digital transactions. Number of digital transactions kept increasing at its own rate.

Another stress factor in the Indian economy is worth noticing here. In the years 2014 – 2016, gap between the number of transactions and their values was small but after 2016, it kept increasing. Although people used more number of digital transactions, their spending did not follow the same pattern due to financial stress and economy slowdown.