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Nilekani panel suggests 10-fold growth in digital payments in 3 years

The government and regulators should facilitate a 10-fold growth in the volume of digital payments in the country in the next 3 years, the RBI appointed committee for strengthening digital payments ecosystem has suggested. This must be achieved through customer-friendly pricing mechanisms and broadening access infrastructure, feels the committee. The 5-member committee headed by former head of the Unique Identification Authority of India Nandan Nilekani was set up by the Reserve Bank of India in early 2019 mandating it to prepare a report after having consultations with all the major stakeholders to strengthen the digital payments industry in the country. The committee had submitted its report on 17 May and the RBI had published it on 3 June.

The committee feels that such a growth will lead to doubling in value relative to GDP and this growth will be driven by a shift from high-value, low-volume, high-cost transactions to low-value, high-volume, low-cost transactions. Noting that India has a large currency in circulation to GDP ratio when compared to other countries, the committee said per capita digital transactions stood at 22 in March 2019 and are expected to increase to 220 by March 2022. This will lead to an increase in the number of users of digital transactions from 100 million to 300 million, it added.

The committee has recommended a set of comprehensive regulatory interventions that are required to achive the goal of a less-cash economy with a focus on “pivoting the ecosystem from issuance to acceptance”. Among the key recommendations in this regard are removing transaction charges on digital payments made to government, creating a competitive Merchant Discount Rates (MDR) pricing structure and easing KYC costs to banks. The committee records that there has been a five-fold growth in the volume of digital payments over the last five years and “this has set a target for additional growth of 10x in three years”. It adds: “This growth will be driven by a shift from high value, low volume, high cost transactions to low value, high volume, low cost transactions. Over a longer period, this will eventually lead to a decline in cash requirements.”

The committee also recommends that the government should be in the forefront of the transition by initiating necessary steps, stating “just as the government budgets for accepting payments in cash, it is recommended that it also budget for accepting digital transactions, ensuring that no convenience fee is charged on C2G payments”. Besides, the government has also been advised to set up digital portals for risk mitigation and complaint registering relating to digital transactions and underscored the need for a special data monitoring mechanism to garner granular district level data on consumer trends and payment behavior. The RBI should create an interchange rate for transactions between customers and leave the MDR on competitive market pricing which would reduce the transaction cost for customers, says the report.

The committee said: “Keeping in mind that digital transactions result in larger balances with the banks, the committee is of the view that customers must be allowed to initiate and accept a reasonable number of digital payment transactions with no charges. Banks have traditionally allowed transactions at branches, ATMs, and through net banking with no fees, seeing it as a part of servicing the customer. That same approach must be used with digital transactions.”

It said there is also a need to provide citizens with the option to pay digitally for all payments to government and public sector agencies.

The committee has also recommended the creation of a No-KYC wallet with a maximum value of Rs 2000 in the wallet and maximum spending capped at Rs 10,000 per month, with the aim of boosting digital payments.

Ram Rastogi, consultant in digital payments and financial inclusion, CGAP, and former head of Product Management – Realtime Payment Services at the National Payments Corporation of India, outlined the major recommendations of the committee in a post in LinkedIn:

  1. No convenience fee on payments made to government agencies by customers.
  2. Elimination of charges, round the clock RTGS and NEFT facility and duty-free import of point-of-sales machines.
  3. RBI to intervene at regular intervals to fine tune interchange fee and to address other related issues, to ensure there is level playing field in the market both for issuer and acquirer.
  4. The interchange on card payments be reduced by 15 basis points (0.15%) as this will increase the incentive for acquirers to sign up merchants.
  5. Current import duty of 18% on POS machines be reduced to nil for a period of 3 years to facilitate adequate expansion of acquiring infrastructure in the country.
  6. Enhance features of ATMs merely from cash dispenser to a complete digital facilitation point.
  7. Internationalization plan for Indian payment systems such as RuPay and BHIM UPI to ease remittances into India and to help Indian travelers make payments abroad.
  8. Government to continue the current scheme to refund the Merchant Discount Rate (MDR) for small value transactions (under Rs 2000) beyond December 2019 for another two years.

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