RBI's Digital Leap: From Cash Woes to a Connected Economy

This episode of RBI Unlocked dives into how India has become a global leader in digital payments, transforming the financial landscape. It explores the journey from traditional banking challenges to the innovative solutions that have made financial services accessible to everyone, everywhere.

Key Takeaways

• Digital Dominance: India leads the world in digital payment speed and volume, a testament to technological advancement.
• Financial Inclusion: A major focus has been bringing banking services to the last mile, ensuring no one is left behind.
• Technological Evolution: From early automation to UPI and CBDC, technology has been central to modernising India's financial systems.
• Resilience in Crisis: The RBI demonstrated remarkable adaptability and commitment during the COVID-19 pandemic, maintaining critical financial operations.
• Building Trust: The RBI's integrity and commitment to public service have fostered deep trust among citizens.

The Digital Revolution in Payments

In today's world, transaction sizes are huge, making cash impractical. Digital technology has been a massive help, bringing banking services to even the most remote areas. India is now seen as a global leader in digital payments. The sheer speed and volume of transactions handled here are unmatched anywhere else.

As the country's economy grows, the financial system relies more and more on technology. Imagine a day when all payment methods suddenly stop working – it would be chaos. The money markets were on the brink of freezing up. There were no standard operating procedures, no guidelines, and no past examples to follow. Working with a fraction of the usual staff brought its own set of challenges, pressures, and stress. The main worry was how to keep things running if something went wrong.

Making Banking Accessible for All

Digital payments have made our lives easier, but they require a bank account. What about those who don't have access to banking at all? People at the bottom of the pyramid are incredibly important, not just to the Reserve Bank, but to the government and everyone in the country. For prosperity to truly exist, it needs to be widespread.

Back in 2005, when Dr. Y.V. Reddy was the Governor, a key push was to include the many people excluded from the banking system. Having a bank account should be a citizen's right. This idea was introduced in the credit policy that year, and for the first time, the term 'financial inclusion' was announced.

For a large country like India, achieving inclusive growth is vital to ensure that the benefits of a growing economy reach every common person. Financial inclusion becomes significant from this perspective – taking banking services to the last mile.

Consider a village without a bank branch. If a customer needs to withdraw ₹500, they have to travel to the bank, incurring travel costs. More importantly, they lose valuable time. It became clear that commercial banks alone couldn't expand their networks to every corner of the country. This is how the concept of Business Correspondents (BCs) came into being.

But BCs working in the field without being connected to a bank branch would be incomplete. This is where technology played its part, providing real-time connectivity to the bank's core banking system. This was a technology-driven financial inclusion effort that later paved the way for Aadhaar to be used as proof of identity and address, a single step that opened the door for technology-led financial inclusion.

Devices like mobile phones, integrated with applications, allowed BCs to perform banking tasks like balance inquiries, mini-statements, and fund transfers. The confidence a person gains when a BC uses a handheld device to authenticate them, and when the machine can speak out the receipt in a language the customer understands, is a big confidence booster. The journey of financial inclusion and the RBI's role in it has been truly transformative.

No other country has achieved such results and progress in financial inclusion and the use of technology for financial services. It's not enough to give people access to the formal financial sector; they must also be equipped to use it. This is where financial literacy comes in – helping people understand what's good, what's bad, what's desirable, and what's a fraud.

It's very important for the RBI that information about its work and services reaches every Indian. The RBI disseminates information on various functional areas to the public through multiple channels. For this, various mediums are used. In the digital age, the RBI advises people to be informed and vigilant. Your understanding is your reward. The message needs to reach all segments of society – the elderly, children, and middle-aged people – in their own language. Our campaigns reach 700 million people. It's unlikely any central bank globally has ever reached so many people with messages.

Modernising Payments: From Cheques to UPI

We are one of the unique central banks with an embedded alternative grievance redressal mechanism. This role is played by the RBI Ombudsman. Apart from the internal ombudsman mechanism mandated for regulated entities, we also have an escalation matrix. This ensures not only grievance redressal but also protects the trust customers have in the banking system.

Today, India is at the forefront of payments and settlements. But reaching this point has been a long journey for the country and the RBI. Going back to the 80s and 90s, you had to visit a bank to withdraw money or take a loan. Even for institutions like banks, if they conducted a transaction in the bond market, they had to come to the Reserve Bank of India and stand in line. It wasn't just people queuing up; banks were queuing up too.

Initially, payments were made by cheque. When cheques were cleared, all the banks would gather at one place and physically exchange them. This was highly inefficient, but it was the only way until computers and automation were introduced.

To automate this, cheques were first encoded with magnetic ink, known as MICR encoding. This allowed the cheque to be read without actually seeing it. We went on a journey to set up almost 84 MICR centres. Over time, we realised we could use digitisation to bring automation into cheque clearing as well. MICR became a major milestone in banking modernisation. Then came ECS (Electronic Clearing Service), which made bulk transactions more efficient. Innovations like EFT and CTS further improved these systems.

After cheques became electronic, the RBI's journey from paper to paperless began with RTGS and NEFT. When you talk about the technical journey of a central bank, the best way for a common person to understand it is by thinking about online shopping. Today, you have multiple payment options: card payments, wallets, and internet banking. All these options have a history. The vision for NPCI (National Payments Corporation of India) as an umbrella organisation for retail electronic payments emerged when we dreamed big about widespread electronic payments.

In 2008, the RBI, along with the Indian Banks' Association, created NPCI. NPCI launched IMPS (Immediate Payment Service), where instant and 24/7 transactions were the basic building blocks. IMPS was intended to be a retail fast payment system, but it had limitations. To send money, you needed to know the bank, branch number, and IFSC code. Another significant gap was that it was only person-to-person payment; you couldn't pay a retailer or a kirana store. This was a big limiting factor.

When mobile phones became widespread and internet access on mobile, or data, became widely available, it truly gave wings to our dreams. This brings us to the story of UPI (Unified Payments Interface). From a consumer's perspective, it's as simple as scanning a QR code or using a UPI ID to make a payment. But this front-end simplicity couldn't have been achieved without a complex back-end. A product like this didn't exist anywhere else. We didn't have a benchmark to meet; instead, we knew we were going to set a benchmark for everyone.

I remember in the 2017-18 budget, a target of 2500 crore digital transactions was set, which works out to about 7 crore transactions per day for all digital payments. In the first two years itself, we were so sure about UPI's potential. We hit the first billion on UPI by early 2019, and a billion was a big deal then. By January 2024, the expectation was that it would reach 500 million transactions a day. Today, in UPI alone, we are seeing transactions in the order of 55 to 60 crore transactions per day.

The Future: CBDC and Beyond

Today, the RBI is guiding India towards CBDC, or e-Rupee, which is a digital version of paper currency. CBDC is going to be the future of money, carried in your mobile phone in a digital wallet. Now, the RBI is on a mission to bring the speed of payment systems into the country's lending system. ULI (Unified Lending Interface) is a platform that enables quick and efficient disbursement of credit. It can revolutionise the way loans are given.

We want to internationalise the Rupee and have our payment systems recognised globally. We aim to be not just the best in India but in the world. These payment systems, which we use for everything big and small, if they stopped for even a day, grocery bills, house rent, everything would halt. Businesses would shut down, salaries would stop. And the crores of transactions the government makes daily to keep the country's development engine running would cease. Every system, every service, every transaction would stop. Without all this, not just the financial system but the entire economy would shut down. It's scary to even think about, isn't it?

Navigating the Pandemic: RBI's Resilience

In this generation dependent on technology, the RBI also faced this fear. During the COVID-19 pandemic, technology became very important. As the Reserve Bank of India, we carry out various functions like currency management, liquidity management, market operations, forex operations, and running the country's lifeline – the payment systems. A substantial part of all these activities depends on computer systems working properly, 24 hours a day, 365 days a year. It's very difficult to even imagine what would happen if this work stopped. Our concern was how we would operate if things went wrong.

Humanity faced perhaps the trial of its time as COVID-19 gripped the world. Everywhere, including India, the mission was to do whatever it takes to prevent the epidemiological curve from steepening further. The human spirit is ignited by the resolve to overcome the pandemic. It is during our darkest moments that we must focus on the light.

When working with technology, you need a Business Continuity Plan (BCP) for any situation. You need disaster recovery centres. If one system fails, those operations are immediately taken over by a backup system. Everything was there – the office, the machines, the power – but the people weren't. Thinking about something like this couldn't have been part of any business continuity plan. So, around March 15th, we decided to set up a quarantine facility to house all our staff and move our money market operations into that facility.

We received a call from the central office asking for exclusive arrangements for officers in a specific location, just for RBI officers, and the duration was not specified. We had no SOPs, no guidelines, no previous precedent to fall back on. So, about 200 people were put in this facility, and it was operational within four days of the decision. I think we are perhaps the only central bank, as far as I know worldwide, that instituted this facility.

This bio-bubble was prepared in just 48 hours with a mission: even if the outside world stops, the Indian economy must keep running. Then, on March 25th, the entire country went into lockdown. It was a completely different experience for all of us. We learned to think very fast about how to address this problem. Our workflows had to change, our work timings had to change.

We were told that we had to go the next day. Arrangements for our stay were made there. There was no specific time planned for how to go or for how long. It could be three weeks, four weeks, which is a very long time to be away from family. My wife was alone at home, and we got to know she was expecting. So, I was very scared because it's already a bit risky, and how would she manage? We were told arrangements were being made for a week, so we could go for a week. As the lockdown extended, so did our stay – basically, we had to stay there as long as the lockdown lasted.

The main challenge was handling all functions with a limited number of resources, ensuring continuity, dealing with cyber risks, and facing the fear of uncertainty and being away from family.

We are working with one-third of the people in this bio-bubble. There are challenges, pressures, and stress. But we have to do what needs to be done. A plan for a few weeks stretched into months. RBI staff remained on duty, day and night, without stopping, without a break, so that the country's critical financial systems would keep running.

Motivation levels were already down, so how do you keep morale up? We arranged for karaoke nights, board games like carrom, billiards, and pool, so people would feel at home and be motivated to go to the office the next day. I recall the Governor speaking to them via video conference, telling them how proud the nation was that they were doing this job. The beauty of the entire setup was that everybody delivered beyond their potential and abilities, doing their best in the best possible manner. We had people who were sick but still came online, facilitated, and guided those in the bio-bubble, which really helped all of us overcome a once-in-a-lifetime situation.

Trust and the Future

We are in the best of times with the hope of technological progress, substantial efficiency gains, better consumer experience, and greater social welfare. The Reserve Bank influences public life in all aspects and has been able to discharge all these mandates to the best of its abilities. While all these substantial benefits remain, we also have to deal with threats – threats of cybersecurity, threats of data breach. We have to ensure all this to make sure that these promising times, these best of times, don't turn into a winter of despair. As part of its vision for RBI at 100, the Reserve Bank aims to further engage with the central banks of the globe.

Over the last several decades, the way the Reserve Bank has dealt with multiple crises and facilitated the economic progress of the country, if you look at the Reserve Bank as a citizen, you get the feeling that you can trust this institution. Never has there been a question on the intent of the Reserve Bank and its people. It is this honesty, this integrity, this commitment to public service and public interest that I believe has brought in the trust of the people in the bank.

Today, India is the world's fastest-growing major economy. Every Indian is dreaming bigger dreams and fulfilling them because, at every step, India has the Reserve Bank of India with it. India has given us a name. We fulfil India's dreams. We have faith. India has given us a name. All our lives, this is our duty to fulfil the dreams of the country. We have received so much from India; this is a responsibility. With pride, we carry this responsibility. We have received so much from India; this is a responsibility.