In October 2022, the Reserve Bank of India released a concept note on Central Bank Digital Currency (CBDC) to explain the objectives, choices, benefits, and risks of issuing a CBDC in India. Subsequent to this, RBI initiated pilot projects for the to test the usage of digital rupee in wholesale and retail markets. This is significant because a Central bank Digital Currency is disruptive in many aspects.
While India has made strides in digital payments, a large portion of the population remain outside digital payments ambit. As per Global Findex report by World bank, around 67 Crore adults with a bank account in India made no digital merchant payment. This may be corroborated by the fact that there are 26 Crore unique UPI users in India, a number which is indeed huge, but less than 20% of the population. We can assume, with some level of confidence that the rest of the population is transacting in cash, if they are not already on UPI. These segments include the under banked and unbanked along with the citizens in banked segment who are not comfortable using UPI apps.
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Retail digital rupee in its current form, with design of tokenized currency notes and wallet based operations without a bank account can be seen as an attempted step towards this inclusion, offering an intuitive payment mode for people who are comfortable transacting in currencies. After all, for a country that is as diverse as India, multiple payment systems can coexist. The challenge lies in creating awareness and trust on the new system. This will require pragmatic policy interventions and everyone of looking forward to the Union Budget 2023 for clarity on way forward.
RBI had launched a pilot of retail CBDC with a closed group of merchants and users in December 2022. It is expected that the union budget will provide insights on the pilots and come up with more use cases on digital rupee. One important area to look forward is the introduction of programmability of digital rupee for direct benefit transfers and priority sector credit disbursement where the currency is used for intended purpose.
This will provide drastic cost saving in terms of administering welfare programs and ensure delivery of welfare services without leakage.
In the current design, RBI has adopted a two-tier model for distribution of digital rupee where intermediaries distribute the tokens and central bank handling only wholesale payments. Budget is also expected to announce incentives and financial support for banks to strengthen the two-tier distribution system to deploy and operate digital rupee wallets.
The union government can earmark a portion of Payment Infrastructure Development Fund exclusively for driving the public infrastructure for digital rupee. The key focus here can be to enable offline channels of the banks such as branches, business correspondents, ATMs and Digital Banking Units for payments and receipts of digital rupee alongside cash.
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Government can also consider augmenting the distribution by enabling other intermediaries, such as pre-paid wallet operators, rural fintechs and NBFCs to act as intermediaries for wallets. After all, distribution system adopted for UPI has proven that enabling third party PSPs to build merchant centric and user centric applications and solutions ensured that the users were incentivized to use the system for convenience as well as cashbacks. Government can also create of a regulatory sandbox for furthering the innovations in digital rupee, especially in offline payments, secure wallets solutions, interoperability, and smart contracts.
Building trust and confidence in the new system is very important in driving adoption. Government may allocate funds towards conducting awareness campaigns and capacity building to increase penetration of digital rupee in areas where cash is still prevalent. For eg. Digital rupee will be beneficial for Non-Banking Financial Companies as they can reduce the physical cash, they hold in branches for cash disbursements.
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It will be beneficial to increase the disbursement limits for digital rupee so that customers and institutions prefer digital rupee. The awareness campaigns also need to educate the customers on possible frauds that may arise from the usage of new payment system. As public trust is important for any payment system, a robust risk management framework early on is necessary for mass adoption. Government will also need to ensure that the new system does not support the shadow economy and illegal transactions by having clear checks and balances.
While it is too early to predict the success of digital rupee, it is imperative to nurture and nourish the new system. While there are several factors that helped adoption of UPI, four main factors that made the difference were the zero charges, mobile number linkage, interoperability, and strong distribution.
While the first two factors-zero charges and mobile number linkage that helped the adoption of UPI seems to be built into the design of digital rupee, government and the regulator need to focus on the last two factors- interoperability and distribution to drive adoption of the new system. Given the experience of already building a payment juggernaut, we can certainly look forward to the government bringing a very well-orchestrated framework for advancing digital rupee.
For now, all eyes are on the pilot studies and the union budget to understand the future course of the new payment system.
(Jaikrishnan G is Partner and Head Financial services consulting at Grant Thornton Bharat LLP. Views are personal)