ATM Crunch: Economic Betterment or Cost Reduction Move

According to RBI data, between May and November 2017, up to 1782 ATMs were shut down all
across the country. This is a first consecutive month on month decline in five years since their
introduction in 1987. This revert was triggered mainly by the rise in digital transactions attributed to
demonetisation done by the Government on 8th November 2016.

Paresh Sukthankar, deputy MD of HDFC bank, in an interview earlier had said, "Customers who were
earlier using their debit cards only for ATM withdrawals are now using them for transactions at
shops. Teller transactions at branches as well as ATMs have seen a reduction or are flattening out.”
Bankers argue that there is no sense in investing in ATMs when there clearly seems to be a definite
shift to digital transactions. The people who are gravely in need of physical cash are mostly in rural
areas.

From the data collected from RBI, we can observe a decline in the total number of ATMs across India
from June 2017 to December 2018.

Region wise deployment of ATMs for the quarter ended June, 2017

Metro Centres Urban Centres Semi - Urban Centres Rural Centres Total

61998 58593 61174 40997 222762

Source: RBI

Region wise deployment of ATMs for the quarter ended December, 2018

Metro Centres Urban Centres Semi - Urban Centres Rural Centres Total
 59159 58427 61658 40807 220051

Source: RBI

Move towards Digital Currency

Prime Minister of India, Narendra Modi in a surprise announcement on 8th November 2016,
demonetized around 86 percent of the cash circulating in India. Demonetisation led to cash crunch
in the country which proved unfavourable to various small businesses, transportation and
agriculture industries. This cash crunch led the public in to frenzy and this created long queues
outside ATMs and banks pan country to exchange notes which only added to their woes. Instead of a
boundless resistance or an uprising, Indian people largely accepted and endorsed the rationale that
demonetization was a so-called surgical strike against corruption, dirty money, hoarding as well as
terrorism in the Indian economy. The ban on the Rs. 500 and Rs. 1000 notes was taken without
appropriate readiness and it unfavourably affected the general society more than the ones it was
intended to.

Banks have proved to be the backbone of this entire process and also the biggest beneficiaries. Bank
employees are giving it their best to make this demonetisation a successful one. As on the
instruction of the government, old notes have to be exchanged with the new ones; this resulted in
increased liquidity position of banks which could be further utilised for lending. Both deposit and
lending rates had been cut by many banks.

Demonetisation had a few drawbacks as well as it gave rise to liquidity problems as people found it
difficult to get sufficient amount of cash to fulfil their basic needs. A marginal section of the society
still mainly depends on cash to meet their daily transactions. Out of the total currency in circulation,
500 rupee notes constituted nearly 49% in terms of value.

From the previous two demonetizations, this one is proving to be a successful one. The era is
changing. Online banking is being used as an alternate and convenient mode of payment. This
demonetisation step was also seen as a movement toward digitalisation.

Particulars Dec-16 Dec-18

Volume(mn) Value(bn) Volume(mn) Value(bn)
110.64 1498.18 N/A N/A
Mobile Banking
RTGS 8.84 84096.48 11.32 116423.7
166.31 11537.63 194.8 19570.4
NEFT

Source: RBI

We can also observe the surge in the volume of transactions in the month after the news of
demonetisation broke out (Nov 2016) till the recent quarter (Dec 2018). Even with this step taken to
encourage digital transactions, cash is inching back to the same levels it was pre note ban.

Rising costs, Stagnant Fees

One of the other major reasons for such decline is the rising costs. There is a rise in costs but the
fees earned by the banks remain stagnant for almost six years at Rs.15 for every cash transaction
and Rs.5 for every non cash transaction. As seen in the table above, the volume of digital
transactions has increased from 2016 to 2018 which has contributed to the fall in the number of
ATM transactions, which determines the revenue which is earned from interchange charges. Even if
the banks were to set up new machines, they are reducing the costs of setting up, space cost and
maintaining ATMs. Banks are even planning on rethinking facilities such as air conditioning and
security guard services as well.

According to the Confederation of ATM Industry (CATMI), “As many as 1 lakh offsite (non-branch)
ATMs of the 2.38 lakhs in the country as well as a little over 15000 white label ATMs could be closed
because of the unviability of operations on account of the high cost of complying with regulatory
guidelines relating to hardware and software upgrades, recent mandates on cash management
standards and cassette swap method to load cash.” White Label ATMs are operated and managed by
non-banking entities in agreements with banks. Confederation of ATM Industry (CATMI) has
estimated an additional expenditure of Rs 3,500 crore solely for complying with the new cash
logistics and cassette swap method. The factors for this additional cost varies from the regulator’s
aim to make ATMs and cash management services safer, to the reluctance of banks to share some of
the increased costs, and also feeble underlying economics of the ATM business. The critical issue is
that of the increased regulatory costs and the debate over who bears the burden. A list of cyber
security measures were provided that were required to be implemented. The ATM industry does not
want to bear these costs alone. Neither do the banks.

Sharp rise in fraudulent practices

A major source of concern for the ATM industry and the banking industry is the rising number of
frauds. According to data available with the cybercrime cell, financial frauds relating to stealing of
credit and debit card information have increased up to 50% in the past year. Fraudsters have found
various means to rob debit as well as credit card data to execute such fraud. Card cloning, replacing
the same at ATMs, SIM card cloning to get One Time Passwords (OTPs) are becoming quite frequent
in the recent past. ATM skimming is the stealing of card information, where a small device, known as
a skimmer, is used to steal the information during a normal ATM transaction. As the card is swiped
at the machine, this skimmer device captures the information stored on the card's magnetic
strip. The bank that has issued the card will pay back the money that is lost to the customer/victim
due to this fraud. The bank will make the payment upfront to the customer if it is confirmed that the
customer is an actual victim. According to the RBI, “The customer liability is zero in a case where the
unauthorised transaction occurs in a third-party breach, where the deficiency lies neither with the
bank nor with the customer, but elsewhere in the system and the customer notifies the bank within
three working days of receiving the communication from the bank regarding such transaction.”

Impact and future

The government’s objective to drive financial inclusion could face a major hindrance if the ATM
framework continues to be inadequate. The ATM industry had requested for an increase in
interchange fee for inter-bank ATM transactions in at least rural ATMs, so that the cash dispensing
business there becomes viable.
In a recent move made by RBI, they have decided to relax rules for White Label ATM operators (Non-
Bank Operators), making it easier for them to purchase wholesale cash from any bank in the country,
this includes cooperatives and regional banks.

Although the dependency on cash has relatively reduced over the recent past, India is not yet ready
to go completely cash free as there are many who are still dependent on cash for their operations. A
recent report suggests that people still use cash as their preferred method of payment. This raises
concerns as approximately 50% of the ATMs in the country are on the verge of shutting down.

Christine Shibani Verghese

1828139

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