Unified payment system will take off soon: RBI governor

The Unified Payment Interface (UPI), part of the government's move towards greater financial inclusion, will be functional by the end of this month, Raghuram G Rajan, governor of the Reserve Bank of India, said.

UPI, which will herald a unified payment system for the whole country, will also help promote cashless transactions, he said.

Under UPI, banks provide customers with a virtual address, which could be shared with the payee. This eliminates the need to share the mobile number or account number, ensuring privacy as well.

"I have been assured by NPCI (National Payments Corporation of India) in this regard and we are on the verge of solving some problems," Rajan said, adding that the UPI will eliminate the need to go to bank branches.

"In the foreseeable future, we will bring formal financial services to every Indian who wants them. Financial inclusion will be an important element in ensuring access and equity - the necessary building blocks for sustainable growth of our country," Rajan said.

With ''expanding cash-in-cash-out points through the soon-to-be-launched Postal Payment Bank and telecom affiliated payment banks and making transfers from bank account to bank account easier via mobile through the Unified Payment Interface, we are on the verge of solving the last mile problem,'' the governor affirmed.

Speaking at the National Seminar on Equity, Access and Inclusion organised by National Institute of Rural Development and Panchayat Raj in Hyderabad, he said the imperative for financial inclusion is both, moral as well as one based on economic efficiency.

On the approaches to financial inclusion, he said an approach based on mandates and subventions (such as priority sector norms and interest subventions) had 'positive' social benefits that were not captured by the service provider and were 'reasonable' from a societal perspective though there were some risks associated with them.

"So, while acknowledging the value of mandates at the RBI, we have tried to make them more effective. For example, the list of sectors eligible for priority sector treatment has been revised, with an emphasis on targeting the truly excluded,'' the Governor said.

"After all, should we not give everyone access to the services we all in this room enjoy?" the Rajan asked, adding that if everyone had the tools and resources to better themselves, it would increase output, growth, and economic prosperity.

Rajan said financial inclusion means the broadening of financial services to those people and enterprises who do not have access to financial services sector, deepening of financial services for those who have minimal financial services and greater financial literacy and consumer protection so that those who are offered financial products can make appropriate choices.

He described the economic impediments to greater financial inclusion include the lack of information, the absence of any incentives and the cost of transaction. If these can be remedied, banks will have no difficulty in lending to the unbanked.

The governor proposed three public policy approaches to overcome this problem: mandates and subventions, transforming institutions, and moving away from credit. But, he said, while mandates are reasonable from a societal perspective, banks cannot monetise this benefit - only a government can decide to mandate them as those benefits are worth generating.

On the approaches to financial inclusion, he said an approach based on mandates and subventions (such as priority sector norms and interest subventions) had 'positive' social benefits that were not captured by the service provider and were 'reasonable' from a societal perspective though there were some risks associated with them.

"So, while acknowledging the value of mandates at the RBI, we have tried to make them more effective. For example, the list of sectors eligible for priority sector treatment has been revised, with an emphasis on targeting the truly excluded,'' the Governor said.

Likewise, creating right institutions such as local financial institutions and going beyond a credit-driven approach to focus on easing payments and remittances could be of help, he added.

Rajan said credit should follow and it should not be leading any operation. The government and the RBI are doing this by encouraging easing of payments and remittances, on expanding remunerative savings vehicles, or on providing easy-to-obtain insurance against crop failures. ''Savings habit, once inculcated, not only allows the customer to handle the burden of repayment better, it may also lead to better credit allocation,'' the governor stated.

''Easy payments and cash out will also make formal savings more attractive. Solutions like strengthening the network of banking correspondents, creating a registry of banking correspondents, giving them the ability to take and give cash on behalf of any bank through the Aadhaar Enabled Payment System and adequately training them in providing financial services would go a long way in reaching financial services to the underserved,'' he added.

"The country has come a long way in the process of financial inclusion, but still has a way to go. We are steadily moving from mandates, subsidies, and reliance on the public sector banks for inclusion to creating enabling frameworks that make it attractive for all financial institutions to target the excluded, even while the interests of the excluded are protected through education, competition and regulation," he concluded.