Cash logistics business is on the cusp of change as digital payments soar

Deregulation of the currency chest system will act as the game changer

Consider this: The currency-in-circulation (CiC) in the country is now a tad over Rs 27 trillion, up by almost 22 per cent from a year ago, despite galloping digital payments. And if you were to allow for the post-demonetisation surge in cash, this is the sharpest uptick to date.

There have been only four occasions during the past fifty years when currency growth was higher than 17 per cent for three to four consecutive years. During 1987-90, 1993-96 and 2005-09, higher currency demand was caused by relatively high growth in nominal gross domestic product (GDP); in the last three years, it happened despite low nominal GDP growth.

You may have thought that the outlier shift in CiC would have come as a boon to cash logistics companies (CLCs). The reality is that nearly two years after the Reserve Bank of India (RBI) and the Union ministry of home affairs (MHA) unveiled safety guidelines for the business, few CLCs are fully compliant. Mahindra & Mahindra and Tata Motors were expected to win orders for nearly 7,000 cash vans valued at Rs 650-700 crore to upgrade their fleet.

Matters came to such a pass that the Indian Banks’ Association — the lobby group of banks that use CLCs, no less — wrote to the RBI for a relaxation in the time-frame for CLCs to meet the net worth conditionality of Rs 1 billion, and new transport and security norms. The fear was that the stringent standards could throw the automated teller machine (ATM) network out of kilter, even as it pushed up the inter-change fee that customers have to bear.

This last aspect has been borne out by numbers: ATMs deployed — by players of all hues — have plateaued at a little over 200,000 over the past five years (their number is now about 235,000); and a key reason for this is the stagnant interchange at Rs 18 per transaction.

Were the changes too rapid for CLCs to handle? “The RBI and MHA guidelines on minimum standards (for the industry) are the outcome of deliberations over the years with all stakeholders, and are not to be seen as sudden. These are matters of hygiene and will stand us in good stead,” says Rituraj Sinha, group managing director, SIS Group Enterprises.

He adds: “India was the only major economy with no defined minimum standards for cash logistics, and that anomaly has been corrected.”

Now look at the plot ahead. The RBI authorises select banks to set up currency chests (CCs) — storehouses for banknotes and coins for distribution to bank branches. But, do we need 3,367 CCs in the country even as digital payments soar? Does it not make more sense to have these outsourced to CLCs? Change may well be on the anvil. 

“Consolidation of vaults for banks and their management by private players is happening globally. In India, discussions around common CC management have been happening for some time now,” says Ravi Goyal, founder-chairman and managing director, AGS Transact Technologies. If implemented, this can prove to be a game changer for the industry.

“The industry is getting to be more organised. Nearly 35-40 per cent of our business is from ATM management and retail cash management. The rest is from cash-in-transit. The bigger players over time will have more diversified streams, or go beyond cash as a commodity,” notes Anush Raghavan, president (cash business) at CMS Info Systems.

“There is a good case for having a shared utility to take care of banks’ CC management requirements. It will reduce costs. However, it will work only if the current system (of banks running their own CCs) is not privileged over the new privately-owned shared utility,” explains Sinha. His point is that a utility like the National Payments Corporation of India set up for CCs will fire only if the cost of the services it provides makes commercial sense.

It could also that be that the move to open up the CC business leads to consolidation among CLCs. “Consolidation is going to happen. In the near future, cash-sorting and processing at vaults will become an important revenue channel in addition to the existing ones,” says Goyal. 

The big four — CMS Info Systems, SIS-Prosegur, Secure Value (a group firm of AGS) and Brinks Arya — haul almost 70 per cent of the daily average Rs 15,000 crore in cash that is moved around. In terms of fleet size, CMS Systems tops with over 2,000 cash vans, followed by SIS-Prosegur with about 1,400. And, these firms are not only into the “commodity part of the business” — such as merely moving cash around the country.

Reflecting consolidation in the payments and cash management space, CMS — backed by Baring Private Equity — acquired the ATM business of Logicash Solutions in November last year, increasing the number of ATMs it services from 62,000 to 72,000.

The whiff of money is always fascinating.