BIS report roots for India’s digital finance infra

New Delhi: India’s digital financial infrastructure, designed and used as a public good, could be a leading example for other emerging markets and economies, according to a paper released by the Bank for International Settlements (BIS) on Sunday.

'The design of digital financial infrastructure: lessons from India’ has detailed the three major advantages of the system in India — giving a unique identity, enabling digital payments and providing data privacy to large sections of the population.

India offers an example of how various policy reforms related to digital finance — including transformation of the traditional banking system with the central bank (regulator) playing a pivotal role — can solve many of the challenges of financial development and inclusion that once seemed out of reach, the paper said.



In 2008, only one in 25 people in India had formal identification and around one in four Indian adults had a bank account. Based on the bank account data and the relationship with GDP per capita, one rough estimate the paper cited said it would have taken 47 years to make 80% of adults hold a bank account had India solely relied on traditional growth processes.

However, through the Pradhan Mantri Jan Dhan Yojana (PMJDY) initiative launched in 2014 and with the use of Aadhaar, almost 380 million bank accounts had been opened by December 2019 .

On the other hand, the Unified Payments Interface (UPI) provided a single interoperable interface to bank accounts, effectively granting everyone mobile access to the payment system and allowing financial transactions to take place instantly, on demand, and in fiat money within the formal financial system.

The monthly volume of UPI digital retail transactions has risen seven-fold since the beginning of 2018 and in November 2019, there were more than a billion transactions, totaling around $27 billion in value. For the six months through September 2019, payments via UPI accounted for 25% of the volume of all digital retail payments.

With regards to data privacy, the paper said that in 2016 the Reserve Bank of India (RBI) established the legal framework for a class of regulated data fiduciary entities, called account aggregators, which enable customer data to be shared within the regulated financial system with the customer’s knowledge and consent.

The paper makes a case for the adoption of India’s digital financial infrastructure on a global scale. Recorded remittances today exceed foreign direct investment flows and official development assistance. Yet, the cost of these remittances, averaging some 7%, is prohibitive and falls on migrant workers who can afford it the least.

If economies were to adopt a UPI-like payment solution, it would not be so much of a technical challenge to set up instant cross-border payments schemes.