Digital Payments Committee Report: Reduce Cash to GDP ratio from 12% to 6%

The Committee on Digital Payments chaired by Ratan P Watal, principal advisor, Niti Ayog has come out with 13 recommendations to help digital payments grow exponentially

Today, it is possible to build secure payment solutions suited to ordinary Indians which are as convenient as sending a message as about sixty-five percent of population have active mobile telephony, ninety nine percent have electronic identity in the form of Aadhaar and about thirty five percent have already adopted use of technology in the form of internet and social messaging. 

According to experts, the phenomenal global growth in digital payments may be attributed to four factors: Digital and technology revolution; entry of several non banking PSPs into payments space; customers becoming more demanding and expecting instantaneous and one-touch payment solutions; and progressive changes in the regulatory framework.

Likewise, in the payments market, the government and the regulator may lay down the ground rules for a competitive market so that markets constantly improve solutions, reduce prices, retain existing consumers and find new ones. This might also mitigate the need for government to intervene regularly. 

The vision of Ratan P Watal committee is to set a roadmap for digital payments to grow substantially over the next three years from the current level of about five percent of personal consumption and twenty per cent of all transactions. India’s Cash to Gross Domestic Product (GDP) ratio is among the highest in the world. Over the next three years, it is the vision of the committee to reduce this ratio from about twelve percent to six percent.  

Ratan P Watal recommendations on Digital Payments:

Create Digital Payment Regulator: The committee has discussed two options. Creating a new payments regulator or make the current Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) within RBI more independent. The committee recommends that the BPSS be given an independent status which today lacks by being a sub-committee of the central board of RBI. 

The statutory status of the new board within the overall structure of RBI called Payments Regulatory Board (PRB) should be enshrined in the Payments and Settlement Systems Act, 2007 and finalisation of structure of PRB may be done in 30 days. 

Update Payments and Settlement Systems Act, 2007: Update the current Act to include explicit mandate for: competition and innovation; open access and interoperability; consumer protection including penalties and independent appeal mechanism; regulations on systemic risks; data protection and security; and process of regulatory governance. 

Promote Digital Payments: Promote digital payments and receipts within government by: Adopting digital payments for all its needs; withdraw all charges levied by government department and utilities on digital payments and bear the cost of such transactions; mandate government departments and agencies to provide option to consumers to pay digitally; incentivise consumers to make payments (including payment of fines and penalties) to government electronically by giving a discount or cash back; enable consumers to make payments (including taxes) to government through suitable digital means like cards and wallets; special emphasis to promote digital payments for recurring low value transactions; and reduce custom duties on payments acceptance equipment. Steps may be initiated in 30 days and reviewed fortnightly. 

Create DIPAYAN Fund: Create a fund proposed as DIPAYAN from savings generated from cashless transactions to expand digital payments. A time period of 60 days may be considered for initiating implementation by user agencies. 

Create Ranking & Reward Framework: A ranking and reward framework should be created to encourage and recognise government departments, state governments, districts and panchayats and other market participants who lead the efforts on enabling digital payments. The framework should be implemented by NITI Aayog along with state governments. Development of the framework may be achieved in 60-90 days. 

Provide Disincentives For Cash: Implement other measures to promote digital payments including: Promoting Aadaar based eKYC and paperless authentication; providing disincentives for usage of cash; and creating awareness and transparency on cost of cash. Implementation by MoF, UIDAI, CBDT, Telecom Regulatory Authority of India (TRAI), Ministry of HRD, DoPT and RBI to be initiated in over 60-90 days. 

Outsourcing RTGS And NEFT: The RBI may, within the existing regulatory framework of Payments and Settlement Act, 2007, immediately initiate steps to consider outsourcing the function of operation of payment systems like Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT). Overtime, multiple payment system operators should be encouraged and payment systems should be operated by market entities. Consultation paper may be released over 180 days. 

Payment System Upgradation: Upgrade payment systems like RTGS and NEFT to operate on 24x7 basis in due course of time. RBI should progressively increase their timings over due course and release consultation paper in over 90 days.

Non-Bank PSPs To Access Payment Systems: Allow non-bank PSPs to directly access payment systems. Regulations may be released for consultation over 60 days.

Expand NPCI To Include More Banks: Ownership of NPCI should be diversified widely to include more banks and include non-banks. The NPCI board should be represented by majority public interest directors and include shareholder directors. NPCI should be allowed to function independently. Regulations may be released for consultation over 60 days.

Make Payments Interoperable: Enable payments to be interoperable between bank and non-banks as well as within non-banks. Mobile number and Aadhaar based fully interoperable payments should be prioritised. NPCI may enable this on its platforms over 60 days. 

Enable Business Models: Create a formal mechanism to enable innovations and new business models. Consultation paper may be released over 90-120 days.

Promote New Measures: Implement other measures to promote digital payments including issuing regulations on Systemically Important Payment System (SIPS) and Systemically Important Financial Institutions (SIFIs), growing acceptance network, enabling faster and cheaper credit and promoting cross border payments. Regulations may be released for consultation over 60-180 days. 

The RBI may within two weeks of releasing this report, develop a comprehensive metric to quantitatively measure and monitor the enhancement of digital payment services in India. 

India is a cash heavy economy, with almost 78 per cent of all consumer payments being effected in cash. India’s preference for cash as a payment instrument is further reflected by India’s significant cash to GDP ratio of (12.04 per cent), which is substantially higher than comparable countries. India’s dependency on cash imposes an estimated cost of approximately Rs 21,000 crores on account of various aspects of currency operations including cost of printing new currency, costs of currency chest, costs of maintaining supply to ATM networks, and interests accrued. 

Transitioning to digital payments is estimated to bring about a significant reduction in costs incurred on account of inefficiencies associated with cash and other paper based payments. For instance, by certain estimates, transitioning to an electronic platform for government payments itself could save approximately Rs 100,000 crores annually, with the cost of the transition being estimated at Rs 60,000 to Rs 70,000 crores. 

The success of the transition will depend on the acceptance of the report and its implementation by respective government organisations related to Digital Payment.  

Pravin Prashant
pravin@varindia.com