The next step for India’s digital-payments system is into the realm of lending
was hit both by the failure of a big bank and a nationwide lockdown in March, bankers, fearing runs from rattled depositors, rushed to stuff cash machines with notes. In fact the demand for cash was relatively subdued. Activity hummed along the Unified Payment Interface , an electronic-payments network that is on its way to becoming the country’s financial lifeline.
In the past two years three big banks or shadow banks have imploded. The severe economic disruption caused by covid-19 will only make lenders’ burden of bad loans heavier. Against this grim backdrop,has shone. In November Google wrote to the Federal Reserve urging it to endorse a similar model for America. The Bank for International Settlements concluded in December that India’s digital financial infrastructure has the “potential to transform emerging markets and advanced economies alike”.
The payment system rests on the Aadhaar card, an identification system with which the fingerprints and irises of more than a billion Indians are registered. Take your card to a bank, as hundreds of millions of Indians have, and you can set up an account; you also become a “known customer”, clearing a regulatory hurdle. You can then, either through your bank or using various apps, send and receive funds instantly from anywhere in India.
Both the identity and the payment layers are controlled by the government, but open to others. As a result, using the system is cheap. Outside India payments tend to be handled mainly by private firms such as Visa, Mastercard, American Express or, in China, Ant Financial and Tencent. These own the pipes through which funds flow, and can charge heavily for their use. Their close relationships with users create high barriers to entry, putting new entrants at a disadvantage.
The benefits of such a system are clear. It would break the links between credit and collateral or personal relationships, and allow even small lenders to get loans based on their transaction histories and their income. When combined with cheap transfer costs, the cost of lending to even the tiniest business could fall. These now pay as much as 4% for a one-day loan.could become most apparent. Only a handful of transactions fail, but glitches have been known to occur.
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