Pits and Falls of Digital Payment in India | UPSC

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IASbhai Daily Editorial Hunt | 22nd Oct 2020

The man who moves a mountain begins by carrying away small stones. – Confucius

Dear Aspirants
IASbhai Editorial Hunt is an initiative to dilute major Editorials of leading Newspapers in India which are most relevant to UPSC preparation –‘THE HINDU, LIVEMINT , INDIAN EXPRESS’ and help millions of readers who find difficulty in answer writing and making notes everyday. Here we choose two editorials on daily basis and analyse them with respect to UPSC MAINS 2020-21.

EDITORIAL HUNT #202 :“Pits and Falls of Digital Payment in India | UPSC

Digital Payment in India | UPSC

R.B. Barman
Digital Payment in India | UPSC

R.B. Barman is Former Executive Director, Reserve Bank of India

      HEADLINES:

Potholes on the digital payment superhighway

      CENTRAL THEME:

The National Payments Corporation of India must be supported and there has to be a rational structure of pricing

SYLLABUS COVERED: GS 3 : NPCI : RBI : Cashless Transactions

      MAINS QUESTION:

NPCI has successfully established its base in India . Discuss the evolution of digital payments in India  -(GS 3)

      LEARNING: 

  • Paperless economy
  • An Umbrella System
  • Merchant Discount Rate

      INTRODUCTION: 

Digital payments have found strong ground, especially in India, increasingly relegating all other modes of payments to the background.

  • CASHLESS ECONOMY : It is through a faster system of simultaneous debits and credits that the money value is transferred from one account to the other across banks.
  • READY CASH : It embraces all kinds of operators (including direct benefit transfer by the government) across the country and even internationally.
  • EASE OF SETTLEMENT : With such versatility the growth of digital payments is going to be phenomenal, supported by banks and Fin-Tech companies.

      BODY: 

STEERED BY THE RBI

  • EVOLUTION OF DIGITAL PAYMENT : There is an interesting history behind the evolution of digital payments in India, piloted by the Reserve Bank of India (RBI) and succinctly captured in the “Payment Systems in India”.
  • RTGS SYSTEM : A major thrust toward large value payments was effected through the Real Time Gross Settlement System, or RTGS, launched by the RBI in March 2004.
  • EXTENT : The large value payments on stock trading, government bond trading and other customer payments were covered under the RTGS, providing finality of settlement.
  • TIME BOUND SETTLEMENTS : thereby reducing huge risks such as the Harshad Mehta scam; besides this, it substantially reduced the time taken for settlements.
  • NEFT SYSTEM : The RBI introduced National Electronic Funds Transfer, or NEFT and bulk debits and credits to support retail payments around the same time.

Now, NEFT is available round the clock and RTGS will follow from December 2020 — only a few countries have achieved this.

  • HISTORICAL CHANGES : Changes brought about by the RBI triggered major corporate and capital market transactions as well.
  • DEEPENING FINANCIAL  INCLUSION : This is expected to attract more international capital into the Indian market, in turn broadening and deepening the financial market.

AN UMBRELLA SYSTEM

  • ROBUST PAYMENT SYSTEM : The sterling contribution especially in retail payments, was seeded and reinforced with the setting up of the National Payments Corporation of India (NPCI) by 10 lead banks at the instance of the RBI in 2009.
  • UMBRELLA INSTITUTION : The idea for this umbrella retail payments institution emerged in the vision document on payments system released by RBI in 2005.

The model appeared as an attractive proposition as payments is basically a public good.

  • POLICY DECISIONS AND CONSUMERS : The setting up of such an umbrella organisation to build a super highway for digital payments has a strong appeal which was well-appreciated by the then RBI Governor too.

INDICATORS OF SUCCESS

  • SUPPORT SYSTEM OF PAYMENT GATEWAYS : It was necessary that the corporation was fully supported by the RBI and the government as an extended arm of the sovereign.
  • GAIN MARGINS : It was also necessary to contain expectations on profits, along with direct or indirect control by powerful private interests which had the potential to dilute the public good character of the outfit.
  • ROOTS OF NPCI SUCCESS : The NPCI’s success against deeply entranced formidable international players, supported by innovative technology, viz.
  • RECOGNITION ON LARGER PLATFORMS : Unified Payments Interface (UPI) and Immediate Payment Service (IMPS), is well recognised by central banks in many other countries.
  • SUPPORT EXPANSION : The payment system network and infrastructure in rural and semi-urban areas in partnership with Fin-Tech companies and banks.

ON MERCHANT DISCOUNT RATE

  • MERCHANT DISCOUNT RATE (MDR) : Zero Merchant Discount Rate (MDR) in recent budget allowed merchants pay to scheme providers, for RuPay and UPI, both NPCI products, to popularise digital payments.

The government left out other providers of digital payment products from this MDR prescription, which is unjustified and had adverse effects.

  • DOMINANCE : Taking advantage of this dichotomy, many issuing banks switched to mainly Visa and Master cards for monetary gains.
  • CARTELISATION : As customers were induced by such supplier banks, it created a kind of indirect market segmentation , though there is hardly any quality difference in payment products.

It may be noted that even the European Central Bank imposed a ceiling on MDR for all, protecting consumer interest.

  • POLICY-INDUCED MARKET IMPERFECTION : It is hoped that the state will take corrective action in the next Budget to ensure a level playing field and to relieve the NPCI .

      IASbhai Windup: 

SETTLE THE PRICING

  • IDEAL PRICE OF TRANSACTION : The ideal pricing for digital payments products should be based on an analysis of producer surplus, consumer surplus and social welfare for which we need cost-volume-price data.
  • FLOATING FUNDS : The float funds digital payments allow (cash withdrawal is a drain on the banking system), which is a source of sizeable income for banks.

The RBI needs to arrive at a rational structure of pricing including MDR , given that the digital payment system is like a national superhighway.

       SOURCES:   THE HINDU EDITORIAL HUNT | Digital Payment in India | UPSC

 

TRENDING NOW : Important The Hindu Editorials 

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