A Note for the attention of SMEs- on Cheque Disincentivisation

RBI Move on Cheques to hit SMEs hard

Reserve Bank of India (RBI) has issued a “Discussion Paper” on “Disincentivisation of issuance and usage of Cheques” on January 31, 2013 and invited public comments by February 28, 2013. Since the proposed changes have a significant impact on the business of SMEs there is a need for them to study the discussion paper and respond in time to prevent the adverse developments which cannot be reversed later. However the discussion paper is available only on the Internet and hence might have escaped the attention of the SMEs. This note tries to highlight some of the key aspects of the proposed changes so that SMEs can discuss the impact of the discussion paper on their business and take suitable action.

It is not a Discussion.. It is a Policy Change Notice

Though the said paper is called a “Discussion Paper”, it makes a “Policy statement” which will hurt SMEs and the Senior Citizens the most. Also though the paper talks of “Disincentivisation”, it is the first step towards abolition of the use of cheques and cash and a forced adoption of Internet Banking. If the policy comes through cheques are likely to be nearly abolished in a couple of years.

The Biggest Danger

There is an impression with some that it is stylish to use NEFT/RTGS for fund transfer and ATM cards for drawing cash. Credit cards are also a status symbol during shopping or dining. There is no denying the fact that E Banking has a great amount of convenience for the user particularly since most Bank transactions can also be conducted using the mobile. RBI is therefore using this fashion statement as a bait to withdraw Cash and Cheque transactions from the system. The discussion paper issued on January 31 is actually presented as a measure towards higher technology usage in Banking. It therefore speaks of incentivising E Banking transactions and simultaneously disincentivising cheque and cash transactions. However, those who move to E Banking will have to face the risks of cyber frauds about which they may not be familiar. This is the biggest danger in the proposed move of RBI to force the transformation of the industry from the current practices to the proposed E Banking practices.

What Disincentivisation means in practice

By “Dis incentivisation” RBI intends to levy penalties for usage of cheques. For example the discussion paper makes the following specific suggestions for current account holders.

1. As a first step, access to cheque books should be made costlier.. There should be no free cheque books given. The charges levied for cheque books issued to such customers may also be increased substantially so that it acts as a deterrent in comparison to alternate electronic payments
Comment: Note the language used. This is RBI talking as if it is an enemy of the current account holders.
2. Customers need to stop issuing cheques and make their payments through electronic means. Therefore, we may consider levying charges for cheques issued by current account holders and these charges may be higher than the corresponding charges if the payment were to be made electronically.
Comment: This would indicate that the charges per cheque leaf could be in the region of around Rs 5 per cheque leaf. If a customer takes a 100 leaf cheque book he may be charged Rs 500/-. This does not mean that there would not be other charges including the leger charges which are being levied even now.
3. In order to discourage them from accepting cheques from their customers, we may consider levying charges on them when they deposit cheques in their current accounts for collection. .
Comment: This means that even for local clearing cheques there may be collection charges levied by the Banks.
4. Cash deposits in current accounts need to be discouraged actively. Hence, it is proposed that steep charges should be levied on cash deposits / withdrawals by current account holders into/from their accounts.
Comment: SMEs cannot avoid cash receipts and payments since many of their transactions are for small amounts. Hence even small units will be having multiple cash deposits and withdrawals each day that cannot be avoided. Hence the cost of Banking will significantly increase.

Diversion of Management attention

In addition to substantial cost increase, the forced switch over from current cash and cheque based business transactions to internet based transactions will involve a major change of business process that would affect invoicing, purchase systems besides the cash management system.

Cheques have been also used by businessmen as instruments to deposit part payments or advances with a flexibility of replacement on a later day before encashment. Such flexibilities in payment management will no longer be available to the entrepreneurs in the new regime.

The Management (which often is the entrepreneur himself) has to therefore devote a substantial part of his time on addressing the business process reengineering and divert his attention from core business requirements.

General Problems

It must be noted that the entreprenerus will also be affected as Individuals along with their clients who will also be charged multiple times for the usage of cheques. For example, individuals will be charged three times for the cheques namely once when cheques leaves are issued and again when cheques are released to the beneficiaries and cheques are collected by the beneficiaries. If users think of shifting to cash, then Cash withdrawals and deposits will also be charged heavily.

When RBI itself uses the words such as “Heavy Charges may be levied”, “Steep Charges to be made” etc. we can expect Banks to freely charge a substantial packet from their customers. At the same time there is no guarantee that in the long run the charges on Internet Banking will not raise.

The logic of RBI is however that account holders need to move towards Internet Banking and ATMs. However ATM withdrawals are not for SMEs and they cannot avoid withdrawal of cash from time to time and also deposit of cash from time to time. Now each of such transactions would be charged based on the number and value of the transactions.

SME’s can forget the convenience of depositing the money after the cheque is presented in the Bank. This means that the working capital requirement of the firms will go up steeply. For example, if payments are to be made to outstation parties today there would be a working capital in the form of cheques issued but not presented. Now this working capital has to be brought in cash.

Many users used to issue Post dated cheques to their suppliers. They need to be replaced with value dated instructions for transfer. The flexibility which was available now for payment will vanish.

Cyber Fraud Liabilities

The biggest problem however is that Internet Banking is a night mare of risks. Cyber Frauds are much more common than cheque frauds. Laws addressing Cheque frauds are well developed and strong. Laws related to frauds in Internet Banking are not well developed and provide plenty of opportunities for Banks to shift liabilities to the customer.

Many Banks are using this opportunity to get RBI declare that Cyber fraud liabilities have to be shifted to Customers. In other words, apart from using the unsafe banking presented by Banks, customers have to also take on the liability. When Internet Banking was first introduced, in 2001, RBI had indicated that Cyber fraud liabilities should be borne by Banks and this was endorsed even in 2011 first by a committee on E Banking security and then by a committee on customer service. However, this discussion paper tries to introduce an element of doubt in the minds of the customers as if they may be held liable for such frauds.

If cheques are removed from the system, Banking law and practice which for generations protected account holders against forgery may be weakened. In course of time Bankers will completely shift the liabilities of cyber frauds on the customers.

As an information security practitioner, I am aware and so are the Banks that the current Internet Banking systems are easily susceptible to frauds and instances of upto 1 and 1.5 crores having been withdrawn in minutes from the bank accounts by hackers is common.

Normally such frauds occur through theft of passwords. But there are many other ways by which fraudsters break into bank accounts and unless the users are themselves Information security specialists, the risk is beyond their capacity to handle.

If additionally any entrepreneur shares his password with an employee, he will be signing his own death warrant. There will be cases of Bank employees colluding with employees of the customers and swindling bank funds once the liability issue is settled in favour of the Banks.

In view of the above, the proposed move of RBI to disincentivise cheques presents a grave risk to SMEs in particular and other persons who are not IT savvy.
UK has withdrawn similar suggestions

In UK, a similar proposal was made earlier but after a public outcry, it was withdrawn. Also the Government gave a public assurance that cheques will continue as long as people want it. We in India have to also strongly protest this move now. If we donot strongly oppose the move, Cheques will vanish into oblivion in a couple of years landing all the traditional current account customers in deep turmoil.
It may be noted that the discussion paper was released on the Internet and responses have been invited on e-mail. If any of us are capable of locating the discussion paper in the RBI website, read it, understand it and then send the email reply, probably we are already Internet Banking capable persons. But a large number of us who may be the real victims of this push to E Banking may neither know that the discussion paper exists nor that a response needs to be sent now before a dead line. (28th February 2013). Since this provision affects non Internet users, RBI should have issued news paper announcements of their intentions and held interactions with the industry, chambers of commerce and public. It appears that like “Fixing a Market Survey”, RBI is trying to restrict the access to the paper only to those who statistically are less likely to oppose the move. This by itself indicates the hidden agenda of those responsible for the issue of the discussion paper.

Need of the hour

In the interest of general bank users it is therefore necessary to create an awareness of the RBI move to all the stake holders so that they may debate the pros and cons of the suggestion and lodge their comments before a final decision is taken by RBI.

There is also a need to alert the traditional media such as news papers and TV so that common men are made aware of what is coming up. It is also necessary to elicit the support of informed MPs to take up the matter with the Finance Ministry so that the move towards “Disincetivisation of cheques” is dropped completely.

I have already submitted my comments to RBI and now invite more members from the public as well as the industry associations to lodge their opposition to the move. A copy of the comments submitted by me as well as a more detailed analysis of the discussion paper is available at www.naavi.org.

Further clarification if required can be provided on request.


Yours sincerely


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About Vijayashankar Na

Naavi is a veteran Cyber Law specialist in India and is presently working from Bangalore as an Information Assurance Consultant. Pioneered concepts such as ITA 2008 compliance, Naavi is also the founder of Cyber Law College, a virtual Cyber Law Education institution. He now has been focusing on the projects such as Secure Digital India and Cyber Insurance
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