UPI: Having Revolutionised Domestic Lending, It Can Now Popularise Rupee Abroad
A couple of anecdotes:
- A busy tea-seller waves away a customer’s offered cash, saying 'next time' because he would rather serve other customers than waste time handling cash.
- A vegetable-seller is happy because he no longer has to waive off Rs2 or Rs3 when the customer claims 'no change'. He gets the exact payment every time.
Unified payments interface (UPI) has pervaded the small payment space, driving out cash, just as national electronic fund transfer (NEFT) and real-time gross settlement (RTGS) have captured the large payment space, nearly eliminating cheques. 
Chances are that you are a ‘user’ (not in the drug addict sense) already because more than half of India’s digital transactions are being done through UPI now. Hence, you probably know how it works and all of that—I need not dwell on it.
But here is something you may not have thought of.
UPI presents a dream opportunity for banks – almost nil-risk lending, good interest rate, high volume, small ticket, automated transactions, plus minimal processing, evaluation and supervision. 
Let me explain.
The small street-side trader, a seller of paan, phuchka, or sabji, has never been considered credit-worthy. In all my years in banking, I have never heard of a ‘business loan’ being given to such a person. 
The reason is simple – he has no collateral.
Now, with the advent of UPI, he can offer the best collateral of all—a regular inflow of money which a bank can track and recover its dues from without chasing after the borrower—an escrow account, in fact.
Our small businessman displays his QR code and gets payment through digital transfers into his bank account. An app announces every credit the moment it occurs so that he doesn’t have to interrupt his work to accept cash and return change.
The bank can see his sales over the past few months, lend him an appropriate amount of money, and collect the interest and repayments automatically, through a computerised auto-debit system, from the money that he earns.
There are only two ways for the loan to become a non-performing asset (NPA):
- Our businessman drops dead or becomes incapable of running his business anymore. The bank can get group insurance covering these risks for all such borrowers.
- Our businessman runs away. But then he becomes a defaulter and his name goes into a defaulter’s list, which can block his future business prospects. Not worth it, from his point of view.
This is a win-win for both parties. Banks have a new avenue to lend money at relatively higher interest rates, with very low default risk and low transaction costs. The small trader gets access to fairly cheap credit rather than suffer a money-lender's usury. He can expand his business and perhaps even employ one or two people.
UPI came into being, so to speak, just 10 years ago, in 2013, when the concept began to emerge as smartphones rapidly captured the Indian market. The advanced capabilities of the smartphone meant that a platform could be built for supporting cardless payments.
In the beginning, its creators did not fully envisage how it would evolve and how its use would expand. What I have described above may have been just one of those things.
Now a new ‘derivative’, if one can call it that, has arrived—the international version of UPI, which is taking the rupee abroad.
Several countries, notably Singapore, UAE and France, have ‘signed up’ with UPI. A number of types of transactions have been identified, such as:
- Indian workers can send money home without having to go to a money exchanger or Western Union while paying a lot less than the current fees, which can be as much as 10%.
- Indian tourists can use their rupee debit cards abroad instead of using Visa or MasterCard (MC) cards.
- Foreign tourists and non-resident Indians (NRIs) visiting India can use their phones to pay for food, and travel. 
UPI’s foreign expansion is still in its infancy. The number of countries where it has a footprint is still quite low, though expanding steadily. Other issues and potential problems have yet to be sorted out, for instance:
- Handling cross-currency and cross-border transactions seamlessly requires the integration of systems between banks, with some adjustments to meet regulatory requirements. Since systems and regulations differ from country to country, there can be no 'one size fits all'. Customisation is required at every step.
- At least two currencies are involved in each transaction—the rupee and the currency of the country—and perhaps a third intermediary currency, usually US dollar. This calls for a robust central treasury function, like the ones at Visa and MasterCard (MC). UPI does not have this, yet.
Other ‘threats’, if I may use the word, loom.
Visa/ MC are already peeved at the proliferation of UPI in India because credit and debit cards issued on their platforms are losing usage in India with the shift to UPI-based channels, such as PhonePe. Visa or MC are losing fee revenue because of this. Now UPI going abroad is a further threat to their business in the lucrative rupee-foreign currency business. 
A bigger issue is—India is trying to internationalise the rupee.
India has already started bilateral trade in the rupee, notably for oil purchases from Russia. India is also mulling the creation of a rupee equivalent of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the international payment system, by developing RBI’s SFMS (structured financial messaging system). This system will be a platform for doing bilateral trade and money transfers without involving the US$.
From US’ viewpoint, overseas UPI and SFMS are India’s attempts to de-dollarise the world economy. If this happens, US will lose its iron grip over the world economy—being the world’s reserve currency and the medium of world trade, and thereby the power to cripple a country through sanctions.
Uncle Sam won’t like this one bit. Some reaction cannot be ruled out, in some form.
But, if India takes it slow and gradual, without fanfare, worming its way into the dollar-based trade system, UPI, SFMS and all the others to follow will succeed, slowly but surely.
Amen to that.
(Deserting engineering after a year in a factory, Amitabha Banerjee did an MBA in the US and returned to India. Choosing work-to-live over live-to-work, he joined banking and worked for various banks in India and the Middle East. Post-retirement, he returned to his hometown Kolkata and is now spending his golden years travelling the world, playing bridge, befriending Netflix & Prime Video and writing in his wife’s travel blog.)
3 months ago
Excellent article and analysis. Perhaps right target borrowers for small finance banks. Bigger banks may not be interested in lending to such small borrowers. And yes, NPCI needs to develop a robust platform for foreign exchange transactions for overseas use of UPI.
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