Modi’s assault on Black money may have an unintentional, but entirely desirable 'fallout' for banks

Banks’ may be allowed to outsource it as it’s not “core” to them.

Banks’ cash logistics operations in the country are set for a major rehaul with Mint Road weighing the possibility of allowing them to be completely outsourced.

A long-standing demand of the bigger banks and cash logistics firms (CLF), the move once activated will, in a fell swoop, cut down on banks’ ATM (automated teller machine) operational expenses by a hefty 30 percent. And it may well lead to a fall in the interchange fee – the Rs 18 you now pay every time you swipe your plastic on an ATM other than your bank’s.

You also have a completely out-of-the-till-box idea that’s regained its currency after what we have seen over last few days – is there a case to treat the cash residing in ATMs at their nightly “cut-over” time of 11 pm (when cash balances are reconciled) towards what’s impounded as banks’ cash reserve ratio (CRR) requirements?

While YourStory can’t tell you for certain if there is such a definite proposal on the CRR aspect up for consideration with the top brass on the 18th floor of Mint Road’s HQ in Mumbai, we can confirm that some senior bankers and cash logistics firms (CLF) want this to be taken up.

One senior banker said, “There’s a lobby that wants to cut down on cash logistics costs. I am not part of it and not sure if Reserve Bank should or will oblige, but if they do so, I will not be one to complain!”

Taken together, all these moves will alter the entire cash-handling topography in India even as it gives a fillip to digital money – an unintentional, but an entirely desirable fallout of the Prime Minister Narendra Modi’s assault on the darker side of the cash economy.

The thinking behind these moves is that the cash logistics business – currency chests, the movement of cash to and fro from branches (it covers like traffic from Mint Road’s vaults too) is not a core function for a bank.

What’s behind the thinking?

The renewed interest in the outsourcing of banks’ cash logistics business is not a fallout of the current demonetisation exercise -- it’s been in the works but since all of this happens at the backend, it’s been off the radar. But to give you a sense of what’s the fuss all about, we will get back to ATMs.

Just how much cash needs to be “fed” into ATMs at the systemic level?

Each “till-box” needs to be “fed” cash four times a month; each “belly-fill” ranges between Rs 10 lakh and Rs 15 lakh. Now at end-September 2016, we had an installed base of 2,20,000 ATMs; so when taken at the lower end (of the amounts being “fed”), it adds up annually to a small sum of Rs 10,56,000 crore. Divide this by 365 days to know how much cash goes into ATMs on a daily basis. A caveat: while only 50 percent of the ATMs were “refed” when matters were “normal” as on date all 2,20,000 ATMs will have be attended to. And that’s bought the cash logistics business into shaper relief.

It wouldn’t be off-the-mark to say there’s much more cash moving about on our roads these days than at any point in the past. But Rajiv Kaul, executive vice-chairman & CEO of CMS Info Systems -- the country’s largest cash logistics firm (CLF) -- articulates it in more exacting words.

“It (cash) is not on the road. It’s in the ATMs; it could be in banks’ currency chests or vaults. Some amount of it will be on the road too, but it won’t be of that level (annual figure of Rs 10,56,000 crore). Because you have to understand a lot of money idles at most points of time, and the amount of it on the move would be a fraction of it.”

What you can’t get away from is all this “cash in transit” – the technical term used in the trade – has its share of body aches given the logistics involved.

Cash not only has to be moved from bank branches, loaded into vans and fed into ATMs, you also have a reverse flow of traffic -- ATMs double up as “deposit-drop” units and when you have an “overfill”, the wads have to be taken into bank branches. While all this is good news on the business front for CIFs, it’s actually a wasteful way of going about the task. It’s a silly merry-go-round to be on in the first place; and worse, hard to get off also. For banks already hit by shrinking interest margins and high operational costs, it makes sense to play the game differently.

So in June this year, the State Bank of India (SBI) decided enough was enough and floated a tender to outsource its cash logistics operations as part of its 'Cash efficiency project: 360-degree solution for end-to-end movement’. Other banks also plan to go down this road.

The genesis of this measure can be traced back to Mint Road’s `Scheme of incentives and penalties for bank branches, including currency chests based on performance in rendering customer service to members of public’ (articulated in circulars from 1 July 2013 to 25 May 2015).

These contained a detailed list of dos and don’ts on the adequate supply of notes to the public, the treatment of what’s soiled and banks’ cash logistics chain. The last aspect was deemed as so critical by Mint Road that few know that it decided to reimburse 50 percent of capital expenditure subject to a ceiling of Rs 50 lakh per currency chest; in the Northeast (NE) up to 100 percent. Revenue expenditure is reimbursed at 50 percent of the same for the first three years; in NE, on the same terms for five years.

If the cash logistics business were to get the leg up it seeks, it will only be a matter of time before the entire ATM business -- now depended largely on the interchange fee – also has a makeover.