Going for e-payments; Should banks support small Retail Trade

by Amit Bhushan on Wednesday 27 September 2017, 8:36 PM | Category: Loans & Investment| View: 438 views

Going for e-payments;  Should banks support small Retail Trade

By: Amit Bhushan                                                  Date: 27th Sept. 2017



Let's analyze the case of Cash-management for a small retail shopkeeper who buys stock on a weekly basis and is able to get about 1 week credit.

Shopkeeper A: Buys/replenishes inventory on a weekly basis and is able to get credit for week from most of his suppliers. His inventory holding is INR 1,500,000/- His own funds into inventories is INR 500,000/-. Let his weekly sales be INR 250,000/- and a margin of about 5% which also takes care for his expenses. In present scenario, his operating surplus for a week is INR 12,500/- while his purchases for week is INR 237,500/-. Basis his weekly surplus of INR 12,500/-, his annual surplus is INR 600,000/-.

His debt to financiers is about 750,000/- since around 250,000/- is financed by suppliers. Let's assume this is being serviced at 18%pa and this comes to INR 135,000/- so profitability is around 465,000/- if other expenses are nil. This case might resemble many ordinary shopkeepers in India.

Now let's say Shopkeeper A is evaluating to go for Digital payments.

Assumption 1: He can be reasonably sure that he will have a 5% growth in sales on account of this on account of being able to cater to card and wallet purchases. He may also estimate that only some 10% of his customers would shift to digital payments means.

Implications: This implies his sales rises to INR 262,500/-. Out of this digital sales is estimated to be INR 37,500/- (i.e. 10% of current sales and additional 5% sales).

Assumption 2: Let's assume Shopkeeper A can negotiate a 0.25% discounts for Cash purchases from 65% of his suppliers. A bank is ready to provide an overdraft facility of INR 800,000/- @ 12% pa while it changes approx. 1.5% for facilitating digital transactions for the shopkeeper.

Implications: This implies his purchases would now be around INR 248,720/- (i.e. 262,500 *(1-5.25%)). His expense for digital purchase is INR 562.5/- (1.5% * 37,500/-). His operating surplus for the week is INR 13218.5/- after taking care of his expenses for the digital transactions. His annual surplus is INR 634,464/-

Now his debt is financed by the bank at 12% and the financing bank is reasonably assured of servicing of this debt by this shopkeeper through his e-payment receipts. The cost of servicing of this debt now for the shopkeeper is INR 96,000/- which is down from previous INR 135,000/-. So the profitability could be around INR 538,464/- assuming nil other expenses as in previous case. This tantamount to a gain of around INR 73,000 or about 15% rise in income.


  • Most gains will be on account of reduced interest viz. approx. INR 39,000/-
  • Other gains are on account of discounts for is annual purchases INR 1,1400,000/- viz. INR 28,000/- approx. and some other gains on account of increased business

While the concerned people may be able to appreciate the increase in income however this may not be sufficient conditions in itself. Support from organized credit providers to be on-board for such credit is might be required. Now many shopkeepers may still be not ready to easily let digital or e-payments become a daily routine on account of old habits. Support would be required from wholesalers association to shift to digital and their readiness to discount cash sales and acceptance of e-transfers may perhaps go a long way. This may bring down the income for some of the unorganized & usurious credit providers usually belonging to the local socio-political nexus or force them to find different markets. There might be more likelihood of compliance with taxes and other laws including consumer protection which would overall be better for the economy and people. The appropriate Fintech platforms to support need for such retail shopkeepers for payments, credit as well as tax compliance on the above account might still be some distance away. However with some micro credit institutions gaining banking license for small finance, there might be still some hope. However these bank would have to turn to Fintech rather than traditional IT vendors to satisfy such needs and hopefully they might realize it sooner than later.


Many of these new banks are again seen to be immersing themselves in the same 'core banking' technologies and even other associated technologies. This might be because of set patterns of thinking in the senior management which probably saw their old technology banks transforming themselves using these technologies and seem to be excited about re-creating the magic again perhaps with a little lesser ills. However their challenges might be quite different if these banks are to focus on 'small business sector' alone for their revenues. So the response probably needs to be something radically different but that 'different' still needs to be defined. Perhaps exploring the Fintechs might be a better option. And given that various changes are taking place for deepening of the Tech saliency amongst the small businesses like the GST or encouragement to e-receipts and e-payments, this might be a good option to explore the Fintechs. Collaboration between the small finance banks and GSPs might be needed to source quality business for these banks and greater service offering as required by the small scale sector. Besides a single Fintech start-up perhaps may still not have a complete solution and this may require some effort on how the management in these new banks with their mandate may want to select various technologies and integrate these into a meaningful solution is something that needs to be seen.

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