With the country undergoing state-wide lockdowns for the second year in a row due to the spread of the COVID-19 virus, one can expect that a larger chunk of the population will increasingly use digital payments platforms and small-medium businesses will turn to similar modes of payment for their daily operations.
While the Unified Payments Interface (UPI) has grown by 92% in terms of the value of transactions to Rs 41 lakh crore in 2020-21, compared to the previous year, the value of retail payments transactions grew by 7% to Rs 41 lakh crore in 2020-21, the Reserve Bank of India (RBI) said in its annual report. Overall, however, the value of digital payment transactions decreased by 12% to Rs 1,410 lakh crore in 2020-2021 compared to the same period of the previous year.
The payment systems recorded a robust growth of 26.2 % in terms of volume during 2020-21 on top of the expansion of 44.2% in the previous year. In terms of value, the contractionary trend which started in the previousyear (-1.2%) got further amplified and witnessed a drop of 13.4%, mainly due to lower growth observed in the large value payment system, viz., Real Time Gross Settlement (RTGS) system and decrease in transactions of paper-based instruments — RBI Annual Report
The RBI said that the decline in the value of RTGS transactions, a payments channel operated by the RBI for large value transactions, is largely attributable to subdued economic activity. The other reason for the drop in overall digital payment transactions is the fall in transactions through paper-based payments instruments (down by 28%), pre-paid instruments (down by 8%), debit cards (down by 6%) and credit cards (down by 13%).
It is important to note that the total digital payments figure include settlement systems operated by the Clearing Corporation of India, and several other retail payments channels. The table below is an abridged version of the data provided by the RBI in its annual report.
In terms of acceptance points, the RBI said that the number of Points of Sale (PoS) terminals increased by 6.5% to 4.72 million, while the number of Bharat QR codes deployed increased by 76% to3.57 million at the end of March 2021. The number of ATMs marginally increased by 2% to 238,000 as of March 2021 from 234,000 as of March 2020.
The COVID-19 pandemic has fast-tracked digital transformation of the payments ecosystem in India. Besides augmenting the broad-based use of technology, the pandemic has fuelled the proliferation of digital modes of payment, propelling the country towards ‘less-cash’ alternatives. Digital transactions recovered from their lows in the months of the lockdown and gained traction over the rest of the year with a growing preference for contactless transactions and tailored financial offerings by FinTech players to adapt to the needs of end-users. Driving the continued policy support by the Reserve Bank and the government is an emphasis on balancing the objectives of fashioning an appropriate regulatory policy, while ensuring an orderly growth of the digital lending ecosystem — RBI Annual Report
Interestingly, the RBI revealed that it wrote to several other central banks highlighting the benefits and efficiencies of the UPI system.
The Reserve Bank continued its efforts towards global outreach of its payment systems, including remittance services. In view of the potential of UPI to provide for stronger bilateral business and economic partnership with other jurisdictions, the Reserve Bank had written to other central banks highlighting the features of UPI as an efficient and secure system, which can be used to transform retail payment mechanisms globally and at the same time promote financial inclusion. The Reserve Bank also participated in regional outreach programmes organised by the Bank for International Settlements (BIS), where the possibility of leveraging UPI system to facilitate cross-border transactions was presented to participants — RBI Annual Report
Agenda Going Forward
At a regulatory-level, the RBI started many new initiatives in the digital payments space in the past year, including setting up the RBI Innovation Hub and a Regulatory Sandbox, both of which are aimed at encouraging innovation in digital payments. While the first cohort of the sandbox focussed on offline payments, the second cohort will focus on Cross Border payments and the third will focus on MSME lending. The RBI said that it received 27 applications for the second cohort of the sandbox.
The RBI has also set up two new committees, with other regulators and internal departments to ensure there is a coordinated approach to regulation, reduce frictions and to ease system operator and customer comfort.
- Inter-Regulatory Committee with the Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), Telecom Regulatory Authority of India (TRAI), Ministry of Electronics and Information Technology (MeitY) and Department of Telecommunications (DoT)
- Intra-Regulatory Committee comprising various regulatory and supervisory departments of the Reserve Bank.
At an industry level, the RBI said it will authorise a Self- Regulatory Organisation for the digital payments industry and it will also authorise a new pan-India New Umbrella Entity(s) for retail digital payments, which will create a new hybrid model of finance that will help address credit gaps and ramp-up last mile outreach.
The prospects for FinTech in India’s financial system in 2021-22 will depend upon the degree of entrenchment of digital usage, which is, in turn, contingent upon the resilience of the underlying acceptance infrastructure, financial literacy and awareness of the users (both merchants and consumers) and strengthening of the customer protection and cyber security protocols in place. All these factors will help in cementing the trust of users in digital modes.
The RBI also operationalised the Payments Industry Development Fund in January this year. The PIDF is a fund with a corpus of Rs 500 crore, which will be used to encourage payments players to deploy payment acceptance infrastructure in tier-3 to tier- 6 centres and northeastern states. Based on their infrastructure deployment, payment companies file claims with the PIDF Advisory Council which will payout a compensation depending on whether the payments player deployed a PoS machine or a QR code in these remote areas. "The scheme envisages creation of 3 million new touchpoints every year for digital payments across the country during 2021-23," the RBI said.
At a policy level, the RBI said it will work on the following initiatives this year:
- Introduce a Pan-India Cheque Truncation System
- Extending geo-tagging framework to capture the location of bank branches, ATMs and Business Correspondents
- Leveraging domestic payments systems to facilitate cross-border transactions in line with G20 recommendations
- Pilot scheme for offline payment solutions using cards, wallets or mobile devices for remote or proximity payments
- Review of charges for inward remittances and examine how to reduce frictions in remittance, and provide such services at lower cost
- Operationalising a new regulatory framework for managing risks in outsourcing arrangements by non-bank payment system operators
- A pro-active cyber immunity surveillance framework will be introduced, which will automate cyber information from financial entities to the RBI for better analysis, cyber simulation/assessment exercises in collaboration with ReBIT
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