|Rana Kapoor, Yes Bank|
On November 8 last year, Modi, a wily politician with a businessman’s mind and a penchant for a strategic gamble, announced plans to ‘demonetize’ Asia’s third-largest economy. At the stroke of midnight, all large-denomination rupee notes, worth Rs500 ($7.50) and Rs1,000, were effectively declared null and void for commercial use.
“This was shock treatment, and sometimes India reacts positively to shock treatment,” notes Rana Kapoor, CEO and managing director of privately run Yes Bank.
The shock extended to the very top of India’s financial community. State Bank of India chairwoman, Arundhati Bhattacharya, was sitting in a waiting room at the Reserve Bank of India’s headquarters in Mumbai, catching up with a select group of bank chairmen, CEOs and managing directors. She assumed it was a regular catch-up with central bank governor Urjit Patel, until she saw a headline roll up on one of India’s many financial news channels.
“We saw the announcement live on TV, along with everyone else in the country,” she says. “There were no special telephone calls to us, no special information.”
Asked about her immediate reaction to the news, Bhattacharya laughs: “It was just: ‘Wow! We’d better get working’.”
The impact is being felt across the financial system. Take Paytm, India’s largest and most influential fintech firm. Founded in 2010 in a suburb of New Delhi, Paytm grew slowly at first, accelerating when it struck a proprietary deal with ridesharing app Uber and again in 2015, when it sold a majority stake to Chinese e-commerce giant Alibaba for $625 million.
Then came November 8. With consumers struggling to adapt to a suddenly cashless economy, many turned to Paytm, a brand already well known in first-tier cities. Within two weeks, its number of users had doubled to 150 million. On February 27, the firm said subscriber numbers had passed the 200 million mark, with 8 million transactions processed daily. Before demonetization, the only language in which it operated was English; it has since added 10 more, including Tamil and Telugu, Marathi and Malayalam.
“In two months, more than half our traffic has converted into non-English,” says Paytm’s senior vice-president Deepak Abbott. “Over the same period, the share of users based in rural or semi-urban areas has gone from 2% to more than 25% and is on track to pass 50% this year.”
But the startling effect of demonetization is being felt far beyond the fintech specialists. For example, HDFC already offered highly regarded mobile and internet banking services, but the events of November 8 have forced the bank to accelerate innovation. A month after demonetization was announced, HDFC chief executive, Aditya Puri, embarked on a weeklong trip to Silicon Valley.
"This was shock treatment and sometimes India reacts positively to shock treatment”-Rana Kapoor, Yes Bank
On his return, HDFC unveiled plans for a new digital wallet called Chillr, a new asset management app and a service enabling customers to secure a loan within seconds by tapping their smartphone. All bar the last are services already offered, and seemingly inspired, by India’s leading financial disrupters.
Yes Bank’s Kapoor goes a step further. He plans to transform how the country’s fifth-largest private lender is viewed by itself and by customers.
“The whole banking sector has been upended in barely a few months,” he says. “In the short term, we will live two lives, maintaining our conventional banking model while accelerating to become a full-service digital bank.”
In January, State Bank of India announced plans to launch its own digital lender, SBI Digi Bank.
“We are currently in the process of digitizing all our products and placing them all on our expanding digital platforms,” says Bhattacharya.
Assuming there is no sting in the tail, demonetization is set to have an enduring impact on India’s economy and identity. Since coming to power, Modi has worked hard to boost financial inclusion, to get consumers to pay their taxes online and to force government departments to invoice digitally.
So far it is working. In the 30 months to end of 2016, 270 million new bank accounts were opened, according to the finance ministry. Government tax revenues jumped 22% year-on-year in the April to December 2016 period, aided, reckons Harishanker Subramaniam, indirect tax leader at EY, by a sharp rise in sales tax and excise duty collections, stemming directly from demonetization.
To SBI’s Bhattacharya, demonetization “will result in a far faster pace of digitization than we could ever have expected”.
HDFC’s Puri adds: “It has opened up new markets, boosted financial inclusion and brought a huge new section of the population into the formal economy. And it has probably accelerated the digitization of the economy and the banking sector by anything up to five years. It was a very good thing that happened here.