In this Moneycontrol podcast, we will discuss another ATM related crisis looming on the horizon.
Madan Sabnavis, chief economist, CARE Ratings, wrote a piece on November 14, 2016 in Firstpost that summed up the dizzying chaos of the early days of demonetisation. Among other things, he described the stress and heartburn caused by the disruption of Automated Teller Machine (ATM) services in just one part of the country. A metro like Mumbai.
He wrote, "The ATM story is still bizarre. On the 11 November one moved in a radius of 4 km between Andheri East and Vile Parle East (in Mumbai), which houses around 25 ATMs. Several ATMs of Kotak Bank and YES Bank were closed, with shutters down. The security guard said that cash was not received.
SBI was taking only deposits. ICICI Bank claimed money was exhausted while HDFC Bank had no one to talk to as the main shutter was down and locked. PNB, Canara, Karnataka Bank, OBC and United Bank had not received stock of money. The only ATM which could give cash at 11 pm was IDBI Bank which probably had currency as it is located in a quiet place."
What was the issue here? Well, his conversations with bankers and security personnel revealed the following. All banks did not have currency chests and did not have access to money. They needed to get money from the RBI and the central bank appeared not to have the stock which meant basically that there was a shortage of currency notes.
"Once a bank gets the money it should have the wherewithal to handle it and disburse to branches. All do not have these facilities. The ATMs need to be reprogrammed to dispense specific denomination notes of fixed quantity and also ensure that the same card cannot be used twice in a day. There is a limit to it as it involves a physical exercise. There are over 2 lakh machines that need such attention. The outcome is also that once these machines are to provide a larger quantity after a pre-specified date, then they have to be reprogrammed. It is not surprising that these notes do not fit and the result is long queues."
The estimation of the cost incurred from realigning ATMs, transportation of cash, security, besides the printing of new notes and destruction of old mites, was pegged in the article to anywhere between Rs 30,000 crore and Rs 40,000 crore. This of course excluded the loss of GDP.
Plus, said the piece, announcing limits on withdrawals at ATMs or exchanging of currency sent out panic messages that the system did not have enough money.
The conclusion by the author? The problem with India and the schemes implemented here is that most of them are formulated in the precincts of institutions with less knowledge of reality. Execution has always been our Achilles heel, and the attitude is always one of jugaad, he wrote.
In this Moneycontrol podcast, we will discuss another ATM related crisis looming on the horizon. One that has already sent alarm bells ringing far and wide.
Multiple news sources reported on November 21 that increased costs to meet new security norms may force automated teller machine (ATM) operators to close the machines. The Confederation of ATM industry (CATMi), the apex body of the domestic ATM collective warned that nearly 50 per cent of the country's 2.38 lakh ATMs face risk of being shut down due to fresh guidelines issued by the RBI. The industry body said the forced closure was on account of unviability of operations brought about by recent regulatory guidelines for ATM hardware and software upgrades, recent mandates on cash management standards, and the ‘Cassette Swap’ method of loading cash.
India Today reported CATMi's fears that at least 1.13 lakh ATMs may cease to exist as early as March 2019. These include one lakh off-site units and 15,000 white-label ATMs that are operated by non-banking financial corporations. CATMi also warned that the move could drastically impact "non-urban" areas.
Reminding us of Madan Sabnavis' Firstpost piece where he had stated that the worst affected by the demonetisation chaos were lower income groups. How dire the situation can be gauged by a statement by CATMi, that a total of almost 7-10 lakh ATMs are required in India to adequately cater to the population of the country. And as the piece informs, India already has the lowest ATM penetration globally, with an average of 8.9 ATMs for one lakh people in comparison to 119.6 in Brazil, 78 in Thailand and 60 in South Africa.
A tipping point
CATMi director V Balasubramanian reportedly told news agency IANS that the recent regulatory guidelines issued for hardware and software upgrade of ATMs has led to higher costs, and that ATM operators have reached a "tipping point".
The intentions are not bad. The cassette-swapping method will enable operators to quickly replenish exhausted ATMs and RBI has asked for the integration of lockable cassettes for adding an extra layer of security as well
Earlier in April, reported India Today, RBI had also asked banks and ATM operators to tighten regulations in order to prevent rising fraudulent activity apart from its larger goal to contain bad loans. However, as always the execution is where we will falter. Neither banks nor ATM operators are happy with the RBI's mandate, which is expected to cost them at least Rs 4,800 crore.
According to CATMi, the new cash logistics and cassette-swap method will alone cost in excess of Rs 3,500 crore.
Balasubramanian explained, "To implement all these security, software-hardware directives would entail an additional cost of minimum Rs 1.5 lakh per ATM per month. This works out to astronomical figures for all the 2.38 lakh ATMs in the country."
Complicating the issue is the fact that there is no clarity if the banks are required to bear the additional cost of meeting these guidelines.
As CATMi said, "The service providers do not have the financial means to meet such massive costs and may be forced to shut down these ATMs."
And Balasubramanian has stated that there is no possibility of continuing operations if the operators are not compensated by the banks for making the initial investments.
India Today warns that while a majority of ATM operators and service providers would be forced to give up their licenses, the closure of such high number of ATMs will make life harder for citizens, especially in rural areas where cash use is still widespread.
A major group to suffer from the fallout would be the millions of hapless beneficiaries under the Pradhan Mantri Jan Dhan Yojana [PMJDY] who withdraw subsidies in form of cash through ATMs. This once again recalls the loss of working hours, inconvenience and stress that citizens suffered in interminable and chaotic queues post-demonetisation.
We quote India Today, "There are millions of people living in rural areas who predominantly use ATMs for withdrawing cash on a daily basis. In such a scenario, closure of over one lakh ATMs may lead to a situation of panic, as witnessed after demonetisation."
In any case, says the report, 10 percent of all ATMs in the country are non-operational at any given time due to various reasons such as unavailability of cash or system malfunction. Considering the facts, a further reduction in the number of ATMs in the country would be perilous, especially in remote areas.
People living in the far flung parts of states such as Uttar Pradesh, Maharashtra, Bihar, West Bengal, Madhya Pradesh and others sometimes have to travel over 40 km or more to access an ATM. It is also feared that many depositors may even resort to hoarding cash at home if the ATM crisis deepens.
Another body blow post demonetisation?
CATMi has additionally stated that operators were already reeling under the financial impact caused by huge losses during and post-demonetisation as cash supply was impacted and remained inconsistent for months.
And the large-scale closure of ATMs will further deliver a body blow with huge job losses in the industry and that in turn would be detrimental to financial services in the economy as a whole.
CATMi has also reported that revenues from providing ATMs as a service are not growing at all due to very low ATM interchange and ever-increasing costs. The additional outlay of about Rs 3,500 crore only for complying with the new cash logistics and cassette swap method was never anticipated by the industry participants at the time of signing contracts with the banks. Many of these agreements were inked four to five years before such requirements were in sight.
Any solution in sight?
Well, there just might be. The Financial Express has reported that the largest ATM supplier NCR is in favour of multi-stakeholder synergy to resolve the problems being faced by the cash vending machines industry.
Financial Express quoted NCR managing director Navroze Dastur who said, “There is a need for the banks, managed service providers (MSPs) and the regulators to discuss and resolve the issues, just like we had done during demonetisation."
Dastur reportedly said there can be a working group or a committee to sort out the crisis. It is the MSPs and white-label ATM operators which are the most impacted as the costs have gone up without a corresponding increase in revenues as most of their contracts are linked per transaction, he explained.
According to Dastur, typically, ATMs next to branches are installed and managed by the banks themselves, while the “offsite” ones are done by the MSP. NCR also has a MSP vertical and takes care of 25,000 ATMs, he said, affirming a commitment to continue with it.
As per RBI data, cash withdrawals from ATMs grew 8 percent to Rs 2.75 lakh crore in August, up from Rs 2.54 lakh crore in October 2016. Dastur indicated that cash is back in the system and ATMs and cash worth over 26 percent of GDP is routed through the ATM network at present. “We cannot afford any disruption in ATMs,” he said.
The path ahead seems a bit tough to navigate as Dastur also noted that there has been a reduction in the number of new ATMs installed this year, and pointed out that the demand for replacements is keeping suppliers busy. He estimated however that up to 12,000 new machines will be installed in the near future.
The Indian Banks’ Association (IBA) had also requested the RBI to relax norms or extend the deadline for cash management, though without gaining any ground so far with the central bank.
And according to a Moneycontrol piece, an intervention from the regulator, National Payments Corporation of India (NPCI), which manages the interchange fee), or the Finance Ministry may be the need of the hour.
Consumers are already finding it tough to wrap their heads around the crisis. Principal Correspondent Beena Parmar quoted Mumbai-based computer science professional Viren Darji in a Moneycontrol piece and he stated, "I use internet and mobile banking, but for a lot of day to day payments while commuting or roadside payments, or at shops, I would need cash...If 50 percent ATMs close down, it will lead to a situation similar to demonetisation."
Sanjeev Patel, President of CATMi cannot ally these fears and he told Money Control, "We have been fighting for the increase in interchange fee from Rs 15 to Rs 18 for financial transactions and from Rs 5 to Rs 8 for non-financial transactions.
The costs are increasing and with the RBI mandate to upgrade, the costs will hike by over 50 percent. So maintaining the ATMs become unaffordable and we have no option but to close down." Patel is also Chief Executive Officer and Managing Director at Tata Communications Payment Solutions, a white label ATM operator.
State-owned Punjab National Bank (PNB) has categorically stated that it has no major plans to reduce the number of its ATMs by March 2019 and that the security measures advised by the RBI are in the interest of the bank and the customers at large. It has already started the process of implementation of the security measures on its ATMs.As of now, we wait and watch for the penny to drop and await a decisive move that hopefully will circumvent the pandemonium the ATM crisis had caused during demonetisation.