Contours of “essential services” amidst lockdown – Impact on efficacy of financial services?

Pursuant to the COVID-19 outbreak, and declaration of the 21-day nation-wide lockdown, market dynamics for most sectors have been significantly altered. Despite, the Ministry of Home Affairs (“MHA”) guidelines for the lockdown dated March 24, 2020 (“Guidelines”)  permitting certain ‘essential services’ to operate with minimal staff, practical struggles have hampered operations. Set out below are certain specific issues in light of issues faced by the Reserve Bank of India (“RBI”) regulated entities.

Lockdown Impact on Financial Services such as Cross Border Remittances

The lockdown was expected to yield a significant surge in digital payments, given increase in contactless communication/ ease of making payments. To aid such payments, vide an addendum to the Guidelines, the Government permitted RBI regulated entities, inter alia including the National Payments Corporation of India and authorised payment system operators to continue businesses.

Further, support services to the operators, i.e. banking correspondents, ATM operations and cash management agencies have also been permitted to operate during lockdown. However, given reliance on traditional payment methods by the public and reliance by small traders on providing supplies for cash as opposed digital payments has resulted in a growing need for cash in the market. However, practical availability of cash to the beneficiaries has hit roadblocks.

For instance, whilst money transfer operators are permitted to operate, there has been a significant drop in actual receipt of cross border inward remittances, which accounts for almost 4% of India’s GDP and is a significant support system for millions of Indian families. The reason behind this significant drop is lack of means to distribute cash to beneficiaries.

The current regulatory framework governing the RBI ‘money transfer service scheme’ operations does not permit distribution of cash to beneficiaries and collection is dependent of the beneficiaries actually accessing the agent outlets. Given the implementation of lockdown, whilst the services are permitted, an actual mode of ensuring payment to the beneficiaries has become stunted with no leeway in sight.

Oversight over Doorstep Cash Delivery Opportunities

Given the above impact, an argument may be made for the RBI to permit banks/ payment system operators to consider providing ‘doorstep delivery of cash’, i.e., permitting its agents to provide beneficiaries with currency at their residence (subject to suitable restrictions).

Whilst provision of currency may not directly get covered under the technical definition of “essential commodity” under the Essential Commodities Act, 1955, Indian currency being the legal tender, is essential for purchase/ consumption of any essential good/ service.

The above proposition is not without precedence. The RBI vide notification dated February 21, 2007 issued guidelines to all scheduled commercial banks to provide doorstep banking inter alia including (i) pick up of cash; (ii) pick up of instruments; and (iii) delivery of demand drafts as services to individual customers/ natural persons through its own employees or through agents. The said notification however, stopped at authorizing these banks from providing delivery of cash.

In addition to the above notifications, the ‘Standard Operating Procedure (SOP) for non-bank money changers during elections’, specified under the RBI Master Directions on Money Transfer Service Scheme, permit the cash delivery directly to the end customers (i.e. the receiver) during elections, subject to the movement of funds being on the basis of requisition made by the receiver and to the address of the destination

As the nation awaits further details on an extension of the lockdown, from a forward looking perspective, a case for cash on delivery, especially to vulnerable individuals, such as individuals residing in ‘COVID hotspots’, differently abled individuals or those aged over 70 years. To further extent this arguments, financial service providers may seek to address challenges such as liability in case of fraud or theft, by incorporating internal checks similar to those implemented vis-a-vis delivery of other payment instruments to address these concerns.

It would be critical for the RBI and the Ministry of Finance to engage with financial service providers to address practical gaps and delve upon alternative financial products in order to assist the market to prevent an economic downturn and simultaneously address COVID-19 concerns.

Rachana Rautray, Associate
Saras Muzumdar, Associate

Date:April 28, 2020