e-Rupee set to boost India’s inclusion

Published: Oct 2023

The digital rupee, India’s central bank digital currency, is expected to be a boon to financial inclusion and also accelerate India’s digital initiatives by building on the infrastructure that is already in place.

Person holding mobile with chart graphics coming out of it

As digital currencies gain momentum around the world, India’s e-Rupee pilot is set to make strides in the country because of its focus on aiding financial inclusion.

The Reserve Bank of India, the country’s central bank, announced a wholesale pilot for the e-Rupee in the beginning of November 2022 and a retail pilot a month later in early December 2022. Since then, the largest banks and merchants have got involved in the trial, including Reliance Retail, the country’s largest retailer. For India, these pilots – while in their early stages – hold great promise for the prospects of digital and financial inclusion because of the infrastructure that India already has in place.

Swarup Gupta, Industry Manager at Economist Intelligence, comments that the majority of the world is currently exploring central bank digital currencies (CBDCs) but each country has different motivations for doing so. These may range from having an effective method for foreign exchange transactions, or central banks wanting to claw back monetary control in the face of private enterprises offering their own digital wallets. With India, however, Gupta says the motivations are different. “The e-Rupee is primarily about financial inclusion,” he tells Treasury Today Asia.

There are numerous use cases for the digital rupee. This, for example could include government disbursements that can be done quickly and effectively with digital payments, instead of distributing physical vouchers that are later reimbursed.

Joydeep Dutta Roy, Executive Director, Bank of Baroda comments that the e-Rupee, “can enhance the efficiency and transparency of government benefit disbursements. Direct Beneficiary Transfers, subsidies, and social welfare payments can be disbursed directly to individuals’ digital wallets, reducing leakages, eliminating intermediaries, and ensuring that funds reach their intended recipients,” he says.

Using a CBDC for this kind of ‘helicopter money’ – as a form of aid during emergencies – is just one of the benefits of the e-Rupee, points out a report on the digital rupee by PwC. Other benefits also include the ability to monitor transactions, and also help with anti-money laundering and combatting the financing of terrorism.

Dutta Roy agrees there is plenty of potential for India’s CBDC. “The digital rupee presents a multitude of opportunities that can reshape India’s financial landscape and drive innovation across various sectors,” he tells Treasury Today Asia. He continues: “In essence, the digital rupee’s opportunities span across sectors, addressing pain points and providing solutions that leverage digital technology. From promoting financial inclusion to enhancing efficiency and security in transactions, the e-Rupee holds the potential to drive economic growth, innovation and empowerment across the nation.”

Dutta Roy goes onto list some of the most compelling use cases, which include micropayments. “The digital nature of the e-Rupee enables seamless microtransactions and micropayments. This opens doors for new business models, such as pay-per-use services, content subscriptions and digital goods purchases, where conventional payment methods are often impractical due to transaction fees,” he says.

In the retail and e-commerce sectors, the e-Rupee offers customers another secure and convenient digital payment method. However, like Gupta, Dutta Roy points out that financial inclusion is a major motivation for the RBI to introduce the digital currency. “One of the most significant opportunities lies in fostering financial inclusion. The e-Rupee can provide access to banking services for individuals who are currently excluded from traditional banking systems, especially those in remote or rural areas. This empowers them to participate in the digital economy, access credit and manage their finances more efficiently,” says Dutta Roy.

Subrahmanyam Oruganti, Partner, Financial Services Risk Management, EY India notes another potential solution the digital currency can offer. He points to the challenges faced by micro, small and medium enterprises (MSMEs) in accessing credit. “MSMEs in India grapple with information opacity, lack of credit histories, collateral, high transaction costs and elevated interest rates. CBDCs, with ledger-based technology, offer a transaction history that can serve as an auditable record, supporting credit assessment. This can reduce transaction costs and interest rates, thereby fostering a more inclusive credit ecosystem for MSMEs,” Subrahmanyam says.

Subrahmanyam comments that the use cases for the e-Rupee include its programmability, cross-border efficiency, offline usability, and the empowerment of micro, small and medium enterprises (MSMEs). “These will converge to reshape financial landscapes, enhance inclusion, and address multifaceted challenges across India’s economy,” he says.

Subrahmanyam explains that the programmability of the CBDC enables targeted uses – which can come in the form of smart contracts and token-based transactions – and for India, opens up opportunities for financial inclusion. The Indian government has been spearheading a financial inclusion programme since 2014, which is known as Pradhan Mantri Jan Dhan Yojana and aims to bring the entire population into the financial system and enable access to bank accounts and electronic payments, as well as access to products such as credit and insurance.

What is interesting about the programmable nature of the CBDC, says Subrahmanyam, is that it’s possible to expand this programme and enable individuals to be onboarded without a functional bank account. This in turn will optimise the social benefits of the scheme and improve financial empowerment, he adds.

Given the geographic diversity and economic diversity in India, and the lack of infrastructure in some places, the offline functionality of the CBDC will also prove useful. “Offline functionality ensures payments can be conducted when both sender and receiver lack network connectivity. This feature proves invaluable in disaster-prone regions and remote areas with intermittent connectivity,” points out Subrahmanyam.

India has already made progress in its development of digital payments and expanding its digital economy. Subrahmanyam comments that when it comes to digital payments, India is world-leading and he cites figures that estimate that two out of three transactions will be digital by 2026. One area that India has made particular progress in is with its Unified Payments Interface (UPI), its instant payments system. With UPI, Indians can pay via their mobiles – using their mobile number as a proxy for an account – and make peer to peer payments as well as pay for goods and services.

The e-Rupee is primarily about financial inclusion.

Swarup Gupta, Industry Manager, Economist Intelligence

With such an advanced payments infrastructure already in place, this raises the question of the rationale for a CBDC. If India already has UPI then why does it also need a CBDC? What can a CBDC offer that UPI can’t? Many people have already posed these questions, which the central bank has been keen to address.

Gupta comments that one major difference is that the central bank digital currency does not have any intermediaries. The RBI Governor Shaktikanta Das also honed in on this lack of intermediaries. “It’s important to clarify this point because a lot of people are asking what is different between UPI and CBDC,” he was quoted by CoinDesk as saying. Another major difference is that UPI is considered to be commercial banks’ money, whereas the CBDC is the central bank’s money, which makes it more akin to cash.

The lack of intermediaries with the CBDC means that costs will be lower, argues Nikhil Jain, CEO and Co-Founder of CredR – a platform for selling used bikes and scooters. “Due to the lack of middlemen and the lower expenses associated with producing and distributing real cash, digital transactions are often less expensive than traditional bank transactions. This might lower the expenses associated with carrying out financial transactions for both people and corporations,” he wrote in a piece for the Economic Times.

The establishment of the central bank digital currency also builds on the existing digital infrastructure that India has put in place to boost its digital economy, and aid financial inclusion – among other goals. This includes the world-leading Aadhaar biometric identification system. This is estimated to have 1.4 billion registered users and is the largest biometric database in the world. By using people’s fingerprints and retina scans as a means of identifying individuals, large segments of India’s population – who may be illiterate or lack formal identity documents – can be included in India’s digital infrastructure and have access to financial services. By being a digital system – that doesn’t rely on paperwork – fraud and corruption has been reduced and more people have a more convenient way to access government services.

Such a system underpins India’s efforts at driving financial inclusion as well as building a digital economy. Meanwhile, the country has also been building the India Stack, a platform of open APIs that are available to government agencies and businesses to leverage the digital infrastructure to solve some of India’s most pressing problems.

Jain comments, “India Stack has the potential to transform the delivery of financial and non-financial services in India, increasing financial inclusion and improving the lives of millions of people. The platform has already been used to build a range of services, including digital wallets, e-signatures and digital locker services, and there is ongoing innovation and development in this area.” He adds that the India Stack is well positioned to support the development of the digital rupee: “The infrastructure and services provided by the India Stack, such as the Aadhaar unique identity program and the UPI unified payment system, can be leveraged to support the issuance and use of a digital rupee,” he writes.

With these digital services already in place, India is well-placed to build its digital future. Gupta argues that many Indians have a greater proclivity to use these digital public goods. “Because of the UPI the e-Rupee will catch on,” Gupta tells Treasury Today Asia. However, at the time of writing the adoption of the e-Rupee had not been widespread. Using the e-Rupee has not been discussed widely, and this is still yet to happen, says Gupta.

In July 2023, the RBI urged the smaller banks to get involved in the digital rupee pilots, in addition to the largest banks that had already signed up. The RBI Deputy Governor T Rabi Sankar was widely quoted by media as saying the central bank was aiming for one million digital rupee transactions per day by the end of 2023. This seems a somewhat ambitious target given that at the time – in July 2023 – the number of transactions per day was estimated to be around the 5,000 to 10,000 mark. “I am targeting one million transactions because it is high enough to understand and study the pattern and not too high that it cannot be achieved,” he was quoted as saying at a meeting of the Indian Banks’ Association. By contrast, the UPI platform has nearly 300 million transactions per day, according to Forbes India.

One way to increase the usage of the CBDC is to make it interoperable with the existing infrastructure. One initiative has seen QR codes which are being used with UPI to be interoperable with the digital rupee. With the use of QR codes, the UPI and digital rupee can “get along with each other in peaceful coexistence,” says Gupta.

For example, Canara Bank introduced a digital rupee mobile app that is interoperable with UPI. Announced in August, the bank stated that its customers would be able to pay with the digital rupee by scanning a merchant’s UPI QR code. “This feature empowers the merchants to accept digital currency payments using their existing UPI QR codes in addition to the UPI based payments without the requirements of a separate onboarding process for CBDC,” Canara Bank said in a statement.

Through the app, the customer can load money into their CBDC wallet, by debiting their associated account, and are also able to redeem digital rupee and credit the amount to the associated account. They can also transfer the digital rupee to anyone with a CBDC wallet. And they can pay businesses with UPI and CBDC QR based payments, and CBDC QR based payments can be used to send and receive payments.

Likewise, Axis Bank also announced in August 2023 that it had added UPI operability to its digital rupee app, the Axis Mobile Digital Rupee.

As such measures are expected to increase the usage of the e-Rupee, treasurers at companies that are affected need to start preparing for the uptake in India’s digital currency. Gupta comments on the challenges that they face in doing so. One of the issues that treasurers face with the use of the digital rupee is that it is possible to use the digital currency without a bank account. “That is a problem for treasurers – that is a headache,” says Gupta. “Treasurers are like goalkeepers – no one remembers how many goals they save… only if they let one go,” he adds. For accepting CBDC payments, this poses a challenge in knowing who is actually making the payments and authenticating and verifying users. With this kind of change in risk management, they need access to real-time data flows to do this. Added to this are challenges with cyber security, says Gupta.

There are other issues when it comes to the handling of digital currencies, such as how they are accounted for, and how they are reported for tax purposes and so on. There are a number of questions that treasurers who are about to embark on using digital rupee should be asking themselves, says Gupta. Some of those questions on the treasurers’ checklist include: Is my data private? Who has access to the data and who is the custodian of that data? Are my transactions secure? Can I trust the other party? What is the level of counterparty risk? With questions such as these, it may become clear to some corporate treasurers of the amount of preparatory work – and time taken to understand the new currency system – that will be involved.

For corporates, there are other benefits to the CBDC, such as its ability to overcome the inefficiencies in the current correspondent banking system for cross-border payments. Also, Gupta foresees a promising future for the digital currency in the use of trade, especially as the QR codes will be able to link up and be interoperable. “Before you did not know where your money was; now you do,” Gupta says of digital currencies.

When asked about the timeline for the e-Rupee to go mainstream and be commonplace in India, Gupta comments that he expects to see a period of coexistence with the UPI and digital rupee, with each having different applications. He expects the two systems to coexist, and with interoperability the digital rupee will likely have more traction, he says.

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