Historically, one of the defining characteristics of almost all central banks has been the monopoly rights over issue and management of currency notes.
This was to suit the economic needs of a nation. It’s a monopoly cast on central banks by statute in most jurisdictions. By making available adequate quantity of cash, central banks grease the economic wheels at an affordable cost.
In keeping with the times and advancement in computer and communications technology, central banks have taken the lead in developing various payment products, outside the traditional cash-based payment system, with a view to reducing cost and enhancing user convenience.
Currency or cash has always come without any charge to the users. Not so with electronic payment products for which customers or beneficiaries in transactions have had to bear a small amount of fees imposed by Payment System Participants (PSPs), Payment System Operators (PSOs), Card Networks, Intermediaries, Third Party PSOs, etc.
So, when the RBI recently placed in public domain a ‘Discussion Paper on Charges in Payment Systems’, seeking public feedback, it was only stating the obvious that “in any economic activity, including payment systems, there does not seem to be any justification for a free service, unless there is an element of public good and dedication of the infrastructure for the welfare of the nation.”
One particular proposal, however, attracted immediate reaction of the Union Government and it was quick to assert that “UPI is a digital public good with immense convenience for the public and productivity gains for the economy. There is no consideration in Government to levy any charges for UPI services.”
Unified Payments Interface or UPI is today a household name recording over 14.55 billion transactions valued at ₹26.19 trillion (Q1 2022). Systems like UPI, IMPS and RuPay are owned and operated by National Payments Corporation of India (NPCI), which is a non-profit entity and “an umbrella organisation for retail payment systems.” Significantly, one of the objectives of NPCI has been to take initiatives that “will contribute towards achieving cashless society.” NPCI is not just a Section 8 company under Companies Act, 2013.
It is now a group having two wholly-owned subsidiaries under its belt. As per the balance sheet (FY 2020-21) of NPCI, the group is prohibited by its objects to carry out any activity on commercial basis.
Is UPI subsidised?
It need be mentioned that the Government had budgeted ₹1,500 crore for FY 2021-22 towards reimbursement of charges for RuPay debit card and UPI transactions. Similar financial support has also been announced for FY 2022-23. Further, the Government had also amended the Payments and Settlement Systems Act (PSS Act), to make the merchant discount rate (MDR) for both the aforesaid products zero, effective January 1, 2020.
This column contends that it is the statutory obligation of the RBI to operate any retail Funds Transfer System that de facto functions as a substitute for currency. Further, UPI, by definition, is not a part of the ‘Funds Transfer Payment System’, like NEFT, RTGS and IMPS, necessitating reimbursement of cost and maintenance charges. UPI is a surrogate for cash and NPCI a proxy for the RBI.
As such, the UPI system does not require any ‘reimbursement’ even by the Government. Section 2(h) of the Foreign Exchange Management Act, 1999 too defines ‘currency’ to include “all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers’ cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank” .
NPCI was originally promoted by 10 banks from both the public and private sectors and licensed as a PSO by the RBI in 2008 as joint initiative of the RBI and the Indian Banks’ Association (IBA) to takeover certain functions from the Institute for Development and Research in Banking Technology (IDRBT). Its mission is to touch “every Indian with one or other payment services.”
Note that by virtue of being the sole operator for its services, licensed by the RBI, it has no competitor and has been bestowed with the monopoly to develop and operate retail payment systems.
That the balance sheet of NPCI for FY 2011-12 says that “the payment and settlement functions of RBI was divested to NPCI and any income generation is only incidental”, further corroborates this contention. NPCI acts like an extended arm of the RBI so far as payment systems are concerned.
Under Section 22 of the RBI Act, 1934, the Bank has the sole right to issue currency notes in India. The RBI has made elaborate administrative arrangements for the discharge of the currency functions. The economy requires a certain quantity of cash to function. Cash used to be the dominant means of payment in day-to-day retail transactions. Cash is also essential for the inclusion of socially vulnerable citizens, such as the elderly or lower-income groups.
Let us not forget that bank notes are the only form of money that people can keep without involving a third party. You do not need access to equipment, the internet or electricity to pay with cash.
Ergo, when the central bank or its preferred agent nudges citizens to shift to electronic payment mechanisms, an obligation arises on its part to make available the small value electronic payment service without any cost to the user.
Printing, distribution costs
The RBI incurs substantial expenditure on printing and distribution of currency notes. Costs under this head, which was ₹2,021 crore in 2006-07 had recorded a CAGR of 6 per cent for a nine-year period reaching ₹3,421 crore in 2015-16. From 2017-18 through 2020-21, expenditure under this head has clocked a negative CAGR of 6.5 per cent, except for the year 2016-17 which was an outlier due to the re-monetisation efforts undertaken by the RBI.
This is supported by the data published by the RBI on printing of currency notes. According to this data (see graphs), currency notes in 10 and 100 denomination have gone down in circulation during the last five years. Similarly, shipments of fresh notes by the presses in denominations of 10, 20, 50 and 100 have been recording secular contraction over the same period.
All these point to only one conclusion: cash payment is being replaced by UPI and other digital means. UPI is the future of cash. Of course, there is another instrument waiting in the wings to replace even the UPI and that is the Central Bank Digital Currency, when issued.
Thus, the savings on account of reduced spend on printing can partially, if not fully today, offset the cost borne by NPCI on promoting UPI without any ‘reimbursement’ by the Government.
UPI has revolutionised the way we carry, pay and settle peer-to-merchant and peer-to-peer transactions of small value, without having to handle currency notes. Today, UPI is going places and evolving as a brand internationally. It needs to be supported and perpetuated as a freebie before some other oven-baked technology takes over.
The writer is a former central banker. Views are personal
August 28, 2022