Salvage Solution 1/3

More than a week into the massive exercise where 86% of currency was demonetised, including the fulcrum note – the Rs. 500, and the note that held many small savings – the Rs. 1000 note. These were called large denominations but given price points, these were the very notes that kept the economy moving. Replacing this currency, or even a significant part of it is a massive logistical exercise that has kept many in long queues outside banks, anxious to be able to access notes that will be accepted by local shops for food, fees and basic necessities. The good news is that the public is still patient, and aligned with the cause of flushing out stocks of black money that were held in these notes. It is tough on many, and the worst hit are the rural interiors where cash is scarce, and the small vendors whose working capital has dried up.

While the government machinery and the heroic bankers work towards replenishing the supply of currency, a few things have become clear. India is not the world leader in logistics planning and we should be grateful that there is no global ranking for it – it would not fare well. The chaos is real and has hurt productivity and business, hopefully only in the short term. There are legitimate fears that the longer it takes for currency to flow through the system, the harder will be the impact on national income. This, at a time when the demonetisation exercise was also seen as a means to nudging the nation towards recorded digital payments, and the implied intent was to replace less than the amount of currency withdrawn. If cash money is to be tighter, then there is all the more reason to now start paying attention to the possible impact on income – and to seek mitigating solutions.

The real and immediate problem is that many small traders, builders and farmers do not have enough cash to sow their next crop, pay their labour or purchase their raw materials. Their cash revenue has dipped as their consumers focus their utilisation of scarce cash on bare essentials. With slow replenishment, and lowered revenues, their vendors and staff too do not have enough cash in hand to keep the money machine churning. Many of them do not even have non cash options, which makes it tougher for them. One can debate the statism quotient of the nudge to being banked, and the efficiencies of a cash economy due to immediacy, trust, low cost and closure (risk), these debates do not change the current reality. There is a chance of a shock to the growth engine and this shock needs smart absorbers for the short term. It is time to start solutioning.

The initial solution offered as part of this exercise to move to digital payments has been mocked by many as being too elitist for the ground reality of India. While it is true that many of those hit are both unbanked and barely literate – digitally and otherwise, there is a grain that rings true in this solution and that is the need for near cash solutions that are transparent and recorded. We will need to create a supportive scaffolding that creates local community co-operative credit solutions and this will need near-digital solutions to ensure transparency and honest records. These are temporary structures to help bridge the current shortage. For example, a builder who is unable to find the precise cash to pay labour, and is currently paying partially, can provide useful near cash to their purchasing collective. The collective receives rations in lieu of full pay, and the credit risk is borne by the builder, who owes the labour money in any case. The builder, if banked, can pay for rations through those channels thus reducing the pressure on the demand for cash. This or another collective can share digital resources such as smartphones and operate multiple accounts on the same device if they are ready and able to be trained. The collective can be a neighbourhood, a trade guild or a village, who come together to swap, share and reduce the need for immediate cash and keep the funds cycle in motion.

There are many ways of designing local solutions using the elements of micro-credit, shared digital and real finance infrastructure, established and less conventional financial hubs such as guilds, NBFCs, banking correspondents, and more. Co-operative Community Credit Collectives are a formal scaffold aligned to many solutions that will emerge from the grassroots where risk and resources will be shared, but otherwise may not be recorded and may create parallel power centres away from the banking system. These collectives must align with the banking system to retain the original purpose of the demonetisation. Like many micro-finance solutions, the risk element of the credit will have to be shared by the local community. Community lending is already proven to be significantly lower than bank lending risk as it rides on peer pressure, transparent record keeping, tiny value at risk and very short duration. Each community will need to self select, or will have to be selected by those who provide the credit and take on the risk. It may be a thought for the government to insure a part of this risk since it is their action that created the situation in the first place. There may be one set of centrally designed micro-credit schemes, or a series of local solutions that share best practices for others to emulate and survive. It is now upto the gurus of financial engineering to create such schemes that can be mapped by local communities to ensure they survive the short term cash crunch.

(Written on Nov 16, 2016)

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