By AP Hota
The Budget announcement on the roll-out of the digital rupee by the Reserve Bank of India (RBI) concluded the debate whether or not to implement a central bank digital currency (CBDC) and when. The primary objective of launching the CBDC has been articulated clearly. By indicating that the CBDC may be implemented with blockchain or ‘any other technology’ has also paved the way for endlessly waiting for blockchain technology to mature. Conventional non-DLT stable technology options are plenty. Given the maturity gained by the country in digital payments and the stature that RBI has earned in the comity of central banks, CBDC implementation in India is now in a visible range. India need not wait for global standards to develop.
The only large economy where a CBDC is being experimented on a national scale is China, which had the compulsion to go for a CBDC in view of absence of competition to two large players in digital payments. A few island nations in the Caribbean region and a couple of countries in Africa introducing a CBDC was mainly driven by the gaps in availability of digital payment instruments and much higher degree of exclusion than in India. The objective of introducing digital rupee in India is to help reduce the usage of currency notes and thereby reduce the ever increasing cost of printing of currency/bank notes and the logistics challenges circulating the same.
As per the prevalent currency management system, RBI prints bank notes (in several denominations) at its captive note printing presses in Mysore and Salboni, stores the notes in about 20 currency vaults at its regional offices, and feeds therefrom to about 4,000 currency chests being managed by commercial banks across the length and breadth of the country. Once currency notes get soiled after repeated use, they are brought back to RBI offices through the same distribution network and destroyed. As the country’s GDP increases from $3 trillion to $5 trillion and per capita consumption level goes up, the demand for currency notes will correspondingly rise to meet the transactional needs. Unless timely measures are taken, operational load would severely affect the functioning of RBI and also the banking systems. Questions had been raised earlier arguing that digital payments in India with the wide range of payment instruments and channels such as IMPS, UPI, NEFT, wallets, debit/credit/pre-paid cards and NETC have made CBDC redundant. The rising digital payment index (from the base index number of 100 as on March 2018 to 304 as on September 2021) has been cited for the purpose. But there is still a wide gap in terms of number of active users of digital payments (hardly 200 million versus the potential of 700 million) and barely 15 million acceptance points versus the potential of 50 million. Cases of cyberfrauds in digital payments and number of cases reaching Banking Ombudsmen of RBI are many. In such circumstances, a radical shift in the format of the ‘medium of exchange’ by way of CBDC, and RBI itself jumping into the fray in managing digital payments infrastructure, becomes imperative. The timeline for going live being aggressive and tasks ahead plenty, the following aspects appear relevant:
Finalise design options: The first task is to finalise design options, if not closed so far. As it happens in any technology implementation, it would be an evolutionary process. The search for a perfect solution would be unending. The easiest option to get started on issuance, circulation and servicing of CBDC of retail nature is to ride the rails of existing digital payments infrastructure. Since blockchain-based technology is yet to stabilise in any financial application, it may be prudent to start with conventional technology and consider blockchain at a later date; account-based would be better for simplicity of communication because they can be operated almost like wallet accounts. On-device UPI wallet being planned by the National Payments Corporation of India (NPCI) can also be moulded for CBDC. Around 10 large banks can be selected to play the role of distributors of digital rupee, each with about a million volunteering customers. Questions on anonymity can be addressed as the pilot progresses by additional suitable privacy layer. Banks can be incentivised by way of reimbursing the cost of initial technical infrastructure and system changes and recurring transaction fees.
Widen acceptance: The second and vital task would be to widen the acceptance infrastructure through steps such as a massive awareness campaign. The Payments Infrastructure Development Fund with an initial corpus of Rs 250 crore contributed by RBI has shown remarkable progress, particularly at tier-3 and tier-4 centres. Seen against the goal of digital acceptance at every kirana store, funding contribution is certainly meagre, and for the next 3-4 years it should be substantially augmented. Wherever cash is accepted, it needs to be enabled for digital acceptance for building a less-cash society.
Digital payment literacy: The third dimension is digital payment literacy. Zero MDR benefit to merchants or cashback benefits to customers would not automatically lead to digital adoption. For converting the unaware, fence-sitters and reluctant critics, different approaches would be required. Large network of business correspondents of banks and citizen service centres can be tried as digital assistants. They need to be trained and then incentivised for new enrolments.
A research institution: The fourth task may be to create a research institution exclusively for the CBDC to take a lead role globally—both for formulating policy and also experimenting with several technologies. There is no doubt that in 10-15 years central banks the world over will go for digital versions of fiat currency. The global institution can commence operation during India’s presidency of G20 during 2023.
Let us now look forward to the beginning of another chapter in digital payments landscape in India.
The author is former head of DPSS, RBI, and former MD & CEO, NPCI.
