Digital payment superhighway

GS 3 Science and Technology Developments and their applications and effects in everyday life.

GS 3 Indian Economy and issues relating to planning, mobilization of resources.

Introduction                

The Digital India programme is a flagship programme of the Government of India with a vision to transform India into a digitally empowered society and knowledge economy.

  • It is through a faster system of simultaneous debits and credits.
    • money value is transferred from one account to the other across banks.
    • embraces all kinds of operators across the country.
    • including direct benefit transfer by the government.
    • internationally, subject to regulatory forbearance.
  • Indian start-up ecosystem is expected to play a crucial role.
    • capable of leveraging the opportunities by addressing a multitude of challenges.
  • supported by banks and Fin-Tech companies.

Current Scenario:

Indian digital payment industry is expected to reach $1 trillion by 2023.

Evolution:

  • Steered by the RBI.
  • The Payment Systems in India, published in 1998.
  • Large value payments was affected through the Real Time Gross Settlement System(RTGS)
    • launched by the RBI in March 2004.
    • such as government bond trading.
    • reducing huge risks(Harshad Mehta scam).
    • reduced the time taken for settlements.
    • Round the clock-will follow from December 2020 
      • only a few countries have achieved this.
  • Introduction of National Electronic Funds Transfer (NEFT)
    • launched by the RBI in March 2004.
    • bulk debits and credits.
    • to support retail payments.
    • available round the clock.
  • Triggered major changes in the corporate and capital market transactions.
  • Large value payments on stock trading, government bond trading and other customer payments were covered under the RTGS.
  • The Securities and Exchange Board of India (SEBI)
  • the market regulator.
    • is contemplating a T+1 settlement (T – transaction date).
    • the underlying consideration of the sale proceeds of the shares get exchanged very fast under the payments system.
  • expected to attract more international capital into the Indian market.
    • broadening and deepening the financial market.

An umbrella system:

  • Retail payments, was seeded and reinforced with the setting up of the National Payments Corporation of India (NPCI) 
    • by 10 lead banks of the RBI in 2009.
    • idea emerged in the vision document on payments system, 2005-08 released by RBI in 2005.
    • model appeared as an attractive proposition as payments is basically a public good.
    • the idea of the NPCI as a not-for-profit company has a link from the BGC.
    • setting up to build a super highway for digital payments has a strong appeal.
      • by Dr. Y.V. Reddy, the then RBI Governor.
      • taking a number of policy decisions to spread digital payments.
      • protect consumer interest.

Indicators of success:

  • With digital payment being a public good like currency notes,
    • was necessary that the corporation was fully supported by the RBI.
    • the government as an extended arm of the sovereign.
    • necessary to contain expectations on profits of stock market.
    •  avoiding gyrations of the stock market along with direct or indirect control 
      • by powerful private interests 
      • which had the potential to dilute the public good character of the outfit.
  • The NPCI’s success against deeply entranced formidable international players
    • supported by innovative technology
      • Unified Payments Interface (UPI) 
      • Immediate Payment Service (IMPS)
    • is well recognised by central banks in many other countries.
  • The Bank for International Settlements endorsement of the NPCI model in 2019 is a major accolade.
  • There is a demand that the NPCI should be converted into a for-profit company to withstand competition
    • The shareholders of the NPCI can have windfall gains.
    • will be a retrograde step with huge potential for loss of consumer surplus,
    • along with other strategic implications.
  • Like the RBI providing free use of the RTGS and other products,
    • the strategy should be to assist the NPCI financially, either by the RBI or the government
    • to provide retail payment services at reduced price.
    • help support expansion of the payment system network and infrastructure 
      • in rural and semi-urban areas 
      • in partnership with Fin-Tech companies and banks.

Merchant Discount Rate:

The Merchant Discount Rate (MDR) is the rate charged to a merchant for the payment processing of debit and credit card transactions from their customers.

  • Budget 2020-21, the government prescribed zero MDR, the rate merchants pay to scheme providers
    • for RuPay and UPI(both) NPCI products
    • to popularise digital payments benefiting both customers and merchants.
    • because depositors implicitly pay around 3% to banks as net interest margin
      • being the difference between saving and risk-free bond rate
      • for enjoying certain payments services traditionally.
    • When banks enjoy such a huge amount of Current Account Savings Account (CASA) deposits,
      • in return, is it not incumbent on them to provide such payment services.
      • costing only a small fraction of such a gain.
      • Government left out other providers of digital payment products from this MDR prescription
    • which is unjustified and had adverse effects.
  • many issuing banks switched to mainly Visa and Master cards for monetary gains.
  • customers were induced by such supplier banks
    • it created a kind of indirect market segmentation and cartel formation
    • though there is hardly any quality difference in payment products.
  • European Central Bank imposed a ceiling on MDR for all, protecting consumer interest.
  • corrective action in the next Budget
    • to ensure a level playing field.
    • to relieve the NPCI from such policy-induced market imperfection.

Way Forward

  • Central government must deadline digitising all its payments.
  • RBI must implement the 100-plus action items 
    • arising from its own Vision 2021 document and 
    • the Nandan Nilekani Committee for Deepening Digital Payments.
  • RBI must also make UPI and RuPay fit for use in our $70 billion inward remittances 
    • that currently come through exploitative financial institutions.
  • The RBI must replicate the design of UPI in bank credit as credit-to-GDP ratio 
    • ratio of the magnitude of loans given by financial institutions in an economy to the GDP in India is low i.e. 50% ( 300% in China.)
  • This needs to be complemented by raising 
    • India’s human capital
    • technology game in regulation 
    • supervision
    • issuing more private bank licences
    • facilitating management changes in old private banks
    • human capital revolution at PSU banks.

While India has a robust start-up ecosystem capable of addressing several digital payment challenges, Government should help accelerate the process through better policies and framework.

With versatility and ease of settling financial transactions, the growth of digital payments in India can be phenomenal with mutual support from banks and Fin-Tech companies.

Conclusion 

             The introduction of UPI by National Payments Corporation of India has shown a remarkable result.               

RBI’s Vision 2021 is a step in the right direction as it looks to create a robust digital payment ecosystem by moving towards a cash-lite economy.

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