Cash Management Industry Analysis
A Industry Analysis
Overview on currency cycle in India:
a. Currency in circulation (CIC) and its impact on economy
Cash in Circulation (CIC) is the sum of cash held by banks and currency held by the general public. As per the below chart, currency in circulation has been witnessing an increasing trend along with the nominal GDP. In the last decade (FY 12-FY 22), CIC has almost increased three folds (at a CAGR of 10.5%), showing a positive growth rate for the period. (Source: RBI, Secondary Sources) A growth in CIC is essential for higher economic activity in the country and augurs well for the companies engaged in cash management industry. While demonetization had a significant impact on CIC, the release of pent-up demand after re-monetization, wealth redistribution, and lower lending rates, led to a vshaped recovery of the total cash in circulation, which has since then almost doubled (in FY 21).
Despite Covid, India's CIC grew by around 32.5% between March 2020 and March 2022. (Source: RBI). As on October 31, 2022, CIC in India stood at a value of INR 30.8 trillion. CIC is predicted to reach INR 43.4 trillion by FY25, growing at a CAGR of 11.4%.
Nominal GDP vs. Cash in Circulation, (INR Trillion) FY 2012-2025:
b. Role of RBI in Currency Management & Circulation
The Reserve Bank of India’s (RBI) primary responsibility is to manage the issuance of currency notes in the economy and to maintain appropriate reserves in order to ensure the country's financial stability. The responsibility of the RBI in this regard is to establish and implement a regulatory framework in the form of policy for all banking and non-banking financial firms. Except for one-rupee notes and coins, which are issued by the Government of India, the RBI is the exclusive authority for the issue of money in India. The RBI's Banking Department is in charge of issuing currency into circulation and withdrawing it from circulation (i.e., growth and contraction of currency, respectively).
Overview of Currency Chests in India:
A currency chest is a receptacle in a commercial bank where the Reserve Bank of India stores notes and coins on its behalf. The RBI has given permission to select bank branches to set up currency chests in order to expedite the distribution of notes and coins. There are currently around 2,878 currency chests and 2,296 small coin depots dispersed across the country as of March 2022. (Source: RBI) In Fiscal Year 2021, the currency chest market was worth over INR 5 billion. The Bank that handles currency chests on behalf of the RBI is mandated to have safety protocols set by the RBI such as the utilization of vaults and safes for effective currency management.
Overview of Currency Chests in India (as on March, 2022):
Growth of Bank Branches in India
The last 5 years have witnessed a growth of 1.8% in the number of branches of SCBs across the country. The increase in branches, especially in rural and semi-urban areas has been an enabler for instilling banking practices in these areas. The RBI anticipates the Indian banking sector's financial performance to improve progressively in the short term, owing to the country's strong economic growth and regulatory leniency in the face of pandemic-related stress. (Source: RBI data) Also the performance of Indian non-bank financial institutions (NBFIs) should be boosted by a stronger economy and expanded government support.
Number of Bank Branches (in 000s), FY 2017-22:
Total Bank Account Holders in India
Nearly 80% of Indians now have a bank account, the same proportion that has a mobile phone. (Source: Economic Times) Between FY 2012 and FY 2021, the number of bank account holders has increased from 300 million to 1.1 Billion. The financial inclusion measures taken by the Government in the form of PMJDY is one of the key reasons for the high growth rate for bank accounts in the country.
Number of Bank A/C holders (in Millions), FY 2012, FY 2017, FY 2021:
Growth in Bank Deposits
India’s banking sector has remained stable despite global upheavals, thereby retaining public confidence over the years. Strong growth in savings amid rising disposable income levels are the major factors influencing deposit growth. The Indian banking sector has shown a significantly healthy performance after the impact of Covid-19. According to the government's Economic Survey presented in Parliament on January 31, 2022, the gross nonperforming loans ratio of India's scheduled commercial banks fell to 6.9% at the end of September 2021, down from 7.5 percent the previous year. Over the same year, banks aggregate capital to risk-weighted asset ratio, or CRAR, increased to 16.54 percent from 15.84 percent, owing to improvements at both state-owned and private-sector banks.
Growth in Bank Deposits (in INR Trillions), FY 2017-23:
Split of Bank Deposits, by Bank Type (in %), FY 2017-22
Distribution of Deposit Accounts
The number of deposit accounts grew at a CAGR of 12% between FY 2010 and FY 2019, with savings accounts contributing to an equal growth rate (12%). The rising working population and the PM’s Jan Dhan scheme have contributed largely to the growth in deposit accounts.
Distribution of Deposit Accounts (in Millions), FY 2010, FY 2015, FY 2018, FY 2019:
Deposit Accounts (as % of Total Deposit Accounts). FY 2010, FY 2015, FY 2018, FY 2019:
Importance of cash as a medium of Transaction in the Indian economy
In comparison with countries that have transitioned into a non-cash method for payments and other transactions, India is still highly reliant on cash as witnessed by the fact that of the total transactions made in the country, only 11% are non-cash related transactions. While Government initiatives such as financial inclusion and digital banking etc. are focusing towards a cashless economy, the country is still a long way from being non-reliant on cash, at least for a foreseeable future.
% of Non-Cash Transactions across Countries, by Volume, CY 2020:
Importance of Cash in the Indian Context
Cash is still a common and widely accepted payment option in India, which has been a cash economy for decades. While the government’s efforts to raise awareness about digital payments, as well as banks ongoing efforts to register merchants to join the digital payments ecosystem, have resulted in an increase in the number of digital transactions, cash remains the preferred mode of transaction in India because of its convenience for citizens in semi-urban and rural areas. It is the bedrock of daily life due to a lack of alternatives, widespread acceptance, and low transaction costs.
Impact of Macroeconomic Disruptions on CIC
During the demonetization phase, the government announced the removal of INR 500 and INR 1,000 notes from the economy which almost constituted 86% of the cash in the economy. This had a huge impact in reducing the cash in circulation and increasing the number of non-cash transactions such as credit and debit cards, mobile wallets, mobile banking and UPI in the economy. But there was a strong bounce-back post the demonetization (By the end of FY 2017, almost 82% of the currency was remonetized) (Source: Financial Express) phase as witnessed by a growth rate similar to that of pre-demonetization levels. (Source: RBI data, Frost & Sullivan Analysis)
While COVID-19 presented as another macroeconomic disruption to the economy, subsequent lockdowns and the general cautious approach of the public towards hoarding cash for future transactions and to meet unprecedented demands, saw an increased use of cash payments and the high volume of cash withdrawals also led to an increase in CIC. CIC in India has grown at approximately 10-12% year-on-year over the last 10 years to reach INR 31.4 trillion in FY 22. India's CIC/GDP ratio in FY 2021, which stood at ~ 15%, is the country's largest since Independence. (Source: RBI)
: Growth of CIC & Impact of Macroeconomic Disruptions, INR Trillions, FY 2012-2025:
Reliance of cash as the primary medium of transactions in India:
Importance of Cash Payments in Smaller Cities
An important indicator of rising cash transactions is the prevalence of Cash on Delivery (COD) as a medium for making payments. In India, COD is the most popular way of payment for e-commerce retailers. COD accounted for more than 60 percent of all e-commerce payments in FY 2022, demonstrating the importance of cash in terms of payments, which is expanding as a result of expansion into Tier 2 to 4 cities. (Source: Fortune India, Frost & Sullivan) As we travel from metros (50 percent COD) to lower tiers such as tier 2 (70 percent COD) and tier 4 regions (90 percent COD), the share of COD payments increases. As e-commerce penetration rises in these lower tiers, the percentage of COD payments is likely to rise in lockstep.
COD as % of E-commerce Transactions, By Tiers (FY 2020):
Cash intensity in India
Despite a growth in digital transactions, cash still accounts for the majority of payment transactions (at point of sale) in India. In FY 2020, approximately 89 percent of all transactions in India by volume were cash-based, down from 99.3% in FY 2011. (Source: Cashmatters, Moneycontrol, Frost & Sullivan) While new payment methods have begun to compete with cash, a considerable section of the country still prefers cash.
Cash Transactions by Volume of Total Transactions (FY 2011, FY 2015, FY 2020), (%):
Benchmarking Cash Transactions as % of Total Transaction Volume
In comparison with the other BRICS nations, the percentage of cash transactions by volume is highest for India, standing at 89% in CY 2020. While most of the other countries have had a significant increase in digital transactions/cashless payments, India still remains a cash-dominant country when it comes to consumer transactions. While digitization has made a dent in the overall cash transactions, the Indian consumers continue to prefer using cash transactions for a variety of reasons including convenience, ease of use and exactness associated with cash as a mode of transaction.
CIC to GDP Comparison (in %), CY 2010 – CY 2021:\
Key Growth Drivers For The Industry
a. Demographic trends in India - Rising Middle Class Income Levels
In the decade ahead, India's middle-class population will continue to grow, boosting consumer demand and spending. By CY 2030, the upper and lower middle classes are estimated to account for 43.5% and 34.2% of the population, respectively. Discretionary spending will rise as disposable income rises, resulting in an increase in transactions, cash volume, and so on.
b. Increase in Working-Age Population
In contrast to China's decline, India's working-age population is predicted to rise between CY 2018 and CY 2030. India is in the midst of a demographic shift, with youth accounting for a sizable portion of the population. With India adding 12 million individuals to the working population each year, the share of the working-age population is predicted to rise from 66.77 % in CY 2018 to 68.4% in CY 2030.
Importance of Rural Contribution to GDP
Key Risk For The Industry
- Increasing digital payment mode across the sector
- Any downturn in economy may impact the overall financial system
- Any slowdown in economic growth of the country
- Competition in CIC segment.