Baba’s Explainer – E-Rupee Vs UPI

  • IASbaba
  • December 13, 2022
  • 0
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  • GS-3: Money & Banking; RBI and its monetary Policy
  • GS-2: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

Context: Reserve Bank of India (RBI) has announced the launch of India’s much-awaited Central Bank Digital Currency (CBDC), E-Rupee, a sort of official cryptocurrency, for retail users from December 1.

  • RBI defines the CBDC as the digital form of currency notes issued by a central bank. It is a sovereign or entirely independent currency issued by the central bank (in this case, RBI), in accordance with the country’s monetary policy.
What is the retail e-Re?
  • E-Rupee (e-Re) is the common name associated with CBDC or central bank digital currency. It is a digital form of legal tender or currency.
  • E-Re could be wholesale and retail. A pilot for the wholesale was launched on November 1, while that for the retail version was on December 1.
  • Four banks – SBI, ICICI Bank, IDFC First Bank and YES Bank – will participate in the first phase of the pilot and four more banks – HDFC Bank, Bank of Baroda, Union Bank and Kotak Mahindra Bank will subsequently be added to the plan, which would cover 13 cities in a phased manner.
  • Just like how telecom operators launch products, e-Re will also be tested on closed user groups or CUGs.
  • The pilot phase is aimed at customers of those banks roped in for the project, as the aim is to test the efficacy of the product.
  • Eventually, the retail version of e-Re can be used by individuals for all transactions, where they use cash to buy things, to give to friends or relatives, to repay debt, etc.
  • While there are no specific transaction limits in value or volume terms, in the initial phases, e-Re may be limited to low-ticket usages.
How will e-re work?
  • Consider cash being consumed out of the digital wallet instead of physical wallets; that’s the way e-Re would function and it would bear the sovereign stamp.
  • In the pilot phase, e-Re would be a push product. Banks would send out a link to identified customers through an email or text message, whereby the e-Re app could be downloaded.
  • Using the mobile number, the customer verification or KYC would be conducted and upon successful completion of KYC, the digital wallet is good to use.
  • The user will then be able to transfer money from the bank account to the wallet. Simply put, instead of withdrawing money from an ATM, you are transferring money into a digital wallet.
  • The amount transferred would assume the exact denominations of physical cash and will not earn interest when parked in the e-wallet.
    • RBI is not in favour of e-rupee with interest. Because people might withdraw money from banks and convert it to digital rupee – causing banks to fail.
  • Therefore, how much non-interest generating money would a user be willing to accommodate would be a determining factor to gauge the acceptance of e-Re.
Why is the RBI moving towards the e-Re?
  • e-Re seems to be a natural next step in the evolution of official coinage (from metal- based money, to metal-backed banknotes, to physical fiat money)
  • There is a cost incurred in printing, transporting and storing currencies and coins that can be rationalised through e-Re.
  • E-Re is also targeted at those who don’t have a bank account, but can use digital currencies similar to a pre-paid mobile recharge card. Likewise, it is not aimed at just smartphone users, but every person with a mobile phone.
  • The e₹ can be converted to any commercial bank money or cash. It would be a fungible legal tender for which holders need not have a bank account – hence, strengthening the cause of financial inclusion. Therefore, e-Re would aid in formalising the digital consumption of money.
  • More importantly, it would provide the general populace an alternative to unregulated cryptocurrencies and their associated risks.
  • It will add efficiency to the settlement system and boost innovation in cross-border payments space and provide the public with uses that any private virtual currencies can provide, without the associated risks.
  • Issuing CBDC allow central banks to more effectively satisfy public policy goals, including operational efficiency, financial stability, monetary policy effectiveness, and financial integrity.
    • The RBI had stated that the key motivations for exploring the issuance of CBDC in India among others include reduction in operational costs involved in physical cash management, fostering financial inclusion, bringing resilience, efficiency and innovation in the payments system.
What is UPI?
  • Unified Payments Interface (UPI) is a common platform through which a person can transfer money from his bank account to any other bank account in the country instantly using nothing but his/her UPI ID.
  • It was launched in 2016 as Mobile First digital payments platform
  • It enables immediate money transfer through mobile device round the clock 24*7 and 365 days based on the Immediate Payment Service (IMPS) platform so as to make cashless payments faster, easier and smoother.
  • UPI is completely interoperable and as such, it is unique in the world, where you have an interoperable system on the ‘send’ and ‘receive’ side
  • It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.
  • Developed by: National Payments Corporation of India (NPCI) under the guidance from RBI.
    • NPCI, an umbrella organisation for operating retail payments and settlement systems in India, is an initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007.
    • It is a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013), with an intention to provide infrastructure to the entire Banking system in India for physical as well as electronic payment and settlement systems.
  • According to the Reserve Bank of India’s Payment Vision 2025, UPI is expected to register an average annualised growth of 50 per cent
Will usage of e-Re hurt the adoption of UPI?
  • This is a genuine fear, but UPI can continue to find takers.
  • UPI works on a settlement basis between two banks. That is, on the front-end, money transfer happens instantly, but at the backend, it takes about a day for inter-bank settlements to conclude.
  • There is a settlement risk in UPI, since there is an intermediary involved. But in e-Re, there is no settlement risk, since it is issued by the RBI and could also be much faster.
  • Further, since UPI is a bank-to-bank payment mode, there is a transaction or audit trail it leaves, which e-Re won’t because it is wallet-to-wallet transfer.
  • RBI is likely to allow anonymity in e-Re transactions, at least in the small-ticket ones. Those who don’t want an audit trail will prefer e-Re.
  • Three, customers are unlikely to be charged anything for using e-Re since usage of cash does not involve any charges. UPI is free now, but could become chargeable going ahead.
  • Users could shift to e-Re from UPI, if it proves efficient and trustworthy, and does not have technical glitches.
  • But those who prefer to keep money in bank deposits and make payments using these interest-earning deposits will continue to prefer UPI.
What are the challenges with retail e-Rupee?
  • From a customer perspective, UPI has established ease of use. Therefore, e-Re needs to prove that it is equally user-friendly with sound technology and data privacy provisions, to lure users.
  • Users also face digital theft such as hacking and virus attacks, which could deter some people.
  • The cultural and social mind-set in the country, which leads to greater use of physical currency, is also a hinderance.

Main Practice Question: Why is digital rupee the need of the time? What do you think are the challenges in adoption of such digital currency?

Note: Write answer his question in the comment section.

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