Module 3- Money

MONEY
BARTER SYSTEM & ITS DISADVANTAGES
1. Lack of Double Coincidence of Wants
2. Lack of a Common Measure of Value
3. Indivisibility of Certain Goods
4. Difficulty in Storing Value
5. Difficulty in Making Deferred Payments
6. Lack of Specialization -- No division of labour
7. Search cost and Transaction cost
8. Fungibility problems

Functions of Money

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Commodity Money

 Perishable
 not uniform
 not pure
 foreigners may not accept

Metallic Money
Traders & Kings: stamped their marks on gold nuggets for uniformity &
trust.
 Indo Greek kings & Kushana kings issued gold coins, but Gupta Gold
coins most spectacular- king is playing Veena, shooting animals,
standing with wife
 Delhi Sultanate Kings: Silver Tanka. Sher Shah Suri Rupiyah silver
coin.
 Akbar: Muhr.

Full bodied vs Token coins

Any money whose face value (exchange value) is equal to or more than its
intrinsic value (the worth of the metallic content of money) is called
standard money. Full-bodied money requires the fulfillment of two
conditions:
1. Money can be shifted from monetary to non-monetary uses without
any cost
2. The metal can be coined into money without limit and without cost.

There is free coinage of standard money and the mint is open to the
public. It is unlimited legal tender and money of account of a country.
Standard coins are generally made of gold and silver.

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Debasement: decreasing the amount of metal in coins. Usually happens

when king’s treasury gets poor e.g. Aurangzeb, Roman Kings.

Token Coins refer to small coins of various denominations, which are

issued to facilitate day-to-day requirements of the people. All Indian
coins, like those of Rs 10, 5, 2 or 1, are token coins since their value as
money is more than value of metal contained in them.

1330s: Tughlaq's Token coin experimentation = Big Failure because

Thomas Grisham’s Law- bad money drives out good money

Paper Money
Fiat money:
1. It’s in the form of coin / currency Notes / (or sometimes virtual
crypto coin).
2. It is issued by the order of a King / Queen / Government / Central
Bank.
Government issues with powers of Coinage Act: All coins upto ₹ 1,000. ₹ 1
Note signed by Finance Secretary

RBI issues currency notes other than ₹ 1 Note. They’re signed by

Governor with the powers in RBI Act.
 Currency notes have Governor’s sign: “I promise to pay bearer…”

When fiat money (currency/ coins) is legally valid for all debts &
transactions throughout the country, such Fiat Money is called a Legal
tender
 The demonetized ₹1000 note in a museum is a fiat money (because
was a currency note issued by RBI), but no longer a legal tender
(because legally it is banned for transactions).
 G-Sec, T-Bill, Shares, Bonds, DD, Cheque, ATM, Cards, Kirana coin,
Casino coin, Bitcoins are NOT Fiat Money, and Not legal tenders.
 Commemorative Coins = Fiat yes but not legal tender unless notified
to be used as legal tenders.

Limited Legal tender

 Payment beyond a limit can be refused.
 Coinage Act 2011
 Rs. 1 / above → upto Rs.1000
 50 paisa x 20 coins → upto Rs.10
 Below 50 paisa withdrawn (2011)

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Unlimited Legal tender

Section 26 of RBI Act: Every bank note is legal tender in India. They can
be used for settling any amount of debt in India

Although in real life, Finance Act 2017: “Cash transactions for less than
Rs.2 lakh only,” Beyond that use Cheque, DD, NEFT etc. else penalty=
entire amount.

Demonetisation
Demonetization of Fiat Money (Previously 1946, 1978) -
8/Nov/2016
 Finance Ministry → Dept of Economic Affairs gazette noti ication to
ban the “Specified Bank Notes” (SBN) of Mahatma Gandhi series ₹
500 and 1000.
 Specified Bank Notes (Cessation of Liabilities) Act 2017= RBI not
required to honor “I promise to pay…”.
 Old notes can’t be kept except for research or numismatics or
museum- and that too in limited amount!

Visually Handicapped (VH) friendly Coins, 2019-March

80 lakh people in India are blind. To help them identify currency notes:
 Old series of Gandhi notes have square (50), triangle (100), circle
(500) diamond (1000)
 New series of Gandhi notes have bleed lines, raised printing of
Gandhi etc.
 But, so many varieties of notes, difficult for them to remember size &
shapes so, IIT Ropar developed Roshni App.

2020-Jan: RBI launched ‘MANI’(Mobile Aided Note Identifier) App. Mobile

camera scan & identifies the note (Even if it’s half folded), gives audio
notification in Hindi/English, also works offline. But can’t validate
whether note is genuine or fake (Counterfeit). by Daffodil Software
company has developed it for RBI. If a user is both blind and deaf, the app
will identify note by giving different set of vibrations
 The application also works offline once installed.
 The application can scan the currency notes using the camera of the
mobile phone.

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Govt has also launched new series of VH-friendly coins of ₹ 1, 2, 5,

10, 20.
 Ascending order of size & weight.
 ₹ 20 coin: 12-sided Polygon, grains/agro motifs, no serration on
edges.
 Remaining coins are round shaped. National Institute of Design
(NID) helped in design.

“I promise to pay the bearer…”: Meaning of this promise?

 Currency note is zero interest, anonymous bearer bond / Promissory
Note.
 Colonia era: Promised to convert into full bodied gold or silver bars
/ coins worth the equal value in weight. E.g. 1 US Dollar = ~14 grams
of gold. 1 British pound = ~73 grams of gold.
 Modern era: Conversion into other Bank notes and “token coins” of
equal face value. ₹ 2000 = 500 x 4 Nos.= 100 x 20 Nos etc. Not
inflation adjusted value. Not linked with weight of gold or silver

₹ 10 Sun Temple, Konark, Odisha. 13th Century Narsimhadev-I

₹ 20 Greenish Yellow, Ellora Caves in reverse.
₹ 50 Humpi Chariot from Vittala Temple, Karnataka
₹ 100 Lavender color. Rani ki Vav on Saraswati river, Patan. Rani
₹ 1000 Udaymati for King Bhima-I of Chalukya / Solanki dynasty
in 11th century, UNESCO Heritage site
₹ 200 Sanchi Stupa, Madhya Pradesh.
₹ 500 Red Fort, Delhi by Shah Jahan.
₹ 2000 Mangal Yaan / Mars Orbiter Mission, 2013
New ₹: through competition by Dept of Eco.Affairs in 2010.
rupee Designed by D.Udaya Kumar, an Associate Professor @IIT
symbol Guwahati.
Languages While 8th Schedule has 22 languages, but currency note
has only 17.
Museum Budget-2020: a museum on numismatics and trade will be
built at the historic ‘Old Mint Building’ in Kolkata.

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Bank Money/Deposit Money

Paper orders: Cheque, Demand Draft (DD)

Viceroy Ripon’s Negotiable Instruments Act, 1881: Primary objective to
legalise the system by which instruments could pass from hand to hand
by negotiation like any other goods.

 THREE parties in a cheque:

a. Drawer (Sender)
b. Drawee (Bank)
c. Payee (Recipient)

 THREE Types of cheques:

a. Stale: Not withdrawn in 3 months
b. Post-dated: After a specific date
c. Anti-Dated: Before a specific date.

 Open / bearer cheque: No ‘crossing’. Anyone can encash.

 IFSC code: Indian Financial System Code- 11 alphanumeric numbers

to identify the bank branch, just like PINCODE identifies an area.

 MICR code: Magnetic Ink Character Recognition. 9 digits code

written in Iron Oxide ink for automated clearance.

 NPCi’s CTS-2010: Cheque Truncation System- scanned image of

cheque electronically sent to the drawee branch for faster clearance
without theft or tempering. MICR readers NOT required.

Demand Draft (DD): can’t be dishonored because sender has to pay

amount beforehand to Bank before the Bank issued DD to him.

Over Draft: When person’s bank balance goes zero, still he’s allowed to
draw money (as a loan). Pradhan Mantri Jan-Dhan account has Overdraft
upto Rs 10,000/- with certain conditions.

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ELECTRONIC ORDERS / DIGITAL PAYMENT

CBS (Core Banking Solution)
It’s a banking software with web-platform for centralized data
management & branchless banking. Finacle (Infosys); BanCS (TCS); E-
Kuber (RBI)

RBI’s RTGS:
 Transfer minimum 2 lakh to Rs. 2000 crores (SBI). Meant for
corporates and high value transactions.
 Only working days 8AM to 5:30PM(SBI)
 Service fee + GST applicable.
RBI’s NEFT
 Transfer upto Rs.10 lakhs (SBI). Settles net amount between banks
at interval of 30 min from 8 am to 7 pm on working days.
 Total 23 settlements in a day.
 Service fee + GST applicable

** 2019-June, RBI waived charges & asked banks to pass benefit to

customers.
NPCI’s IMPS
 24x7 via mobile, internet. Minimum ₹ 1 to 2 lakhs (SBI)
 While RTGS/NEFT require IFSC code so can be offered only by
BANKS, but IMPS can be offered by Banks as well as Prepaid
Payment Instruments (PPI) / mobile-wallet companies such as
Phonepe, Mobikwik etc.
 Service fee + GST applicable.

Card payment Gateways

Mastercard, Visacard, NPCi’s Rupay etc. They’re not free. MDR charges
applicable.

Clearing Services
 RBI’s National Electronic Clearing Service (ECS) & NPCI’s National
Automated Clearing House (NACH) for Monthly utility bills, salaries,
premiums etc. automatically paid from bank account.

Payment System Operators / Payment Service Providers / Prepaid

Payment Instruments
 They’ve to register with RBI under the provisions of Payment and
Settlement Systems Act, 2007. e.g. NPCi, PayTM, Amazon Pay,
Western Union etc

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NPCI and its services

What is NPCi?
National Payments Commission of India is a “Not for Profit Company” 10
promoter banks with ₹ 100 crore capital to provide cost-effective
payment solutions for banks (in 2008).
 Its UPI-BHIM app & other mechanisms also help in financial
inclusion of villagers & poor by expanding the reach of banking
network.

NPCi’s Aadhar enabled payment system

 Useful for Direct Benefit Transfer (DBT) into beneficiary’s account
for MNREGA wages, LPG subsidy, scholarship etc.
 It’s also required for Bankmitra-MicroATM system.
 2017: IDFC First Bank launched the IDFC Aadhaar Pay app- India's
first Aadhaar-linked cashless merchant solution. Customer simply
gives Aadhar number, merchant takes his thumbprint on mobile
app, money transaction completed from customer’s bank account
without any MDR charges. No Point of Sales (PoS) card-swipe
machine required.

BBPS
Bharat Bill Payment system for automated monthly payments of utility
bills

NACH
National Automated Clearing House for bulk monthly payments of
utility bills, dividends, salaries, pension / insurance premiums etc.

NFS
National Financial switch runs the ATM network, IMPS, UPI and BHIM

CTS : Cheque Truncation System (2010)

The Unified Payments Interface (UPI)

It is a system developed by the NPCI and the RBI to aid instant transfer
of money using a cashless system. Using UPI services, one just requires

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a smartphone and a banking app to send and receive money instantly or

to pay a merchant for retail purchase. In the long run, UPI is likely to
replace the current NEFT, RTGS, and IMPS systems as they exist today.

UPI, built on IMPS, allows a payment directly and immediately from

bank account. There is no need to preload money in wallets. It allows
payments to different merchants without the hassle of typing one’s card
details or net-banking password.

The UPI ecosystem functions with three key players:

1. Payment service providers (PSPs) to provide the interface to the
payer and the payee. Unlike wallets, the payer and the payee can
use two different PSPs.
2. Banks to provide the underlying accounts. In some cases, the bank
and the PSP may be the same.
3. NPCI to act as the central switch effecting credit and debit
transactions through IMPS.

UPI 1.0
 QR Scan & Pay to merchants.
 You can link Current Account (CA) Savings Account (SA) for direct
transfer of money without storing in ‘wallet’ first. (unlike PayTM)
 Such app can have Push transaction (e.g. Remittance to family),
Pull Transaction (e.g. monthly bill deduction by Electricity Co.) or
even Bill sharing among friends.
 Examples of UPI based app: SBI’s SBIBuddy, Axis Bank’s AxisPay
and NPCi’s own BHIM.

UPI 2.0 (2018 Aug)

Upgraded version with following features:
 Overdraft Account linked [until now only CA,SA]
 Cash on Delivery, User mandate for future date e.g. DTH / Gym.
 Invoice in the inbox. QR authenticity – whether merchant verified
or not?
 One-time Mandate (account blocking) – It allows customers or
merchants to pre authorize a transaction and pay at a later date.
 The pre-existing transaction limit (1 lakh daily) has been raised to
2 lakh daily.

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UPI – Benefits to the Ecosystem participants:

Benefits for banks:
1. Universal Application for transaction.
2. Leveraging existing infrastructure.
3. Safer, Secured and Innovative.
4. Payment basis Single/ Unique Identifier.
5. Enable seamless merchant transactions.

Benefits for end Customers:

 Round the clock availability.
 Single Application for accessing different bank accounts.
 Use of Virtual ID is more secure, no credential sharing.
 Single click authentication.
 Raise Complaint from Mobile App directly.

Benefits for Merchants:

 Seamless fund collection from customers – single identifiers.
 No risk of storing customer’s virtual address like in Cards.
 Tap customers not having credit/debit cards.
 Suitable for e-Com & m-Com transaction.
 Resolves the COD collection problem.
 Single click 2FA facility to the customer – seamless Pull.
 In-App Payments (IAP).

BHIM (2016)
 It works on Android, iOS/Apple mobile phones as an APP, and even
on non-smart (=basic feature) phones using *99# USSD-
Unstructured Supplementary Service Data.
 Bank to bank / peer to peer transaction using mobile phone
(xyz@upi). No need to install multiple apps for each bank account
(SBIBuddy, AxisPay etc) just one BHIM app to use all such bank
accounts. App has 3 factor authentication system.
 Your money stays in bank account and earns interest. It’s not
stored in ‘wallet outside your bank account’ as it happens in
Mobikwick, Phonepe etc. No cards involved so no MDR or such
hidden charges.
 Sweden: “Swish” app to make their country 100% cashless by
2020.

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BHIM 2.0?
 Donation’ gateway, increased transaction limits for high value
transactions, linking multiple bank accounts, offers from
merchants, option of applying in IPO, gifting money.
 It also supports three additional languages — Konkani, Bhojpuri
and Haryanvi — over and above the existing 13.

The BHIM apps has three levels of authentication:

1. For one, the app binds with a device’s ID and mobile number.
2. Second a user needs to sync whichever bank account (UPI or non-
UPI enabled) in order to the conduct transaction.
3. Third, when a user sets up the app they are asked to create a pin
which is needed to log into the app. The UPI pin, which a user
creates with their bank account is needed to go through with the
transaction.

BHIM goes International

BHIM app has gone international with a pilot demo of BHIM UPI QR-
based payments beginning at the ongoing Singapore FinTech Festival
2019.

 This QR code-based system would allow anyone with a BHIM app

to scan the SGQR at NETS terminals for payments in Singapore.
 The project is being jointly developed by NPCI and NETS of
Singapore. It is targeted to go live by Feb 2020.

BharatQR (2016)
While PayTM QR code will not work with Phonepe app (interoperability
issue), the BharatQR Quick Response code works with all UPI based
apps & BHIM

RuPay (2016)
 Rupee + Payment = RuPay card is world’s 7th payment gateway
similar to Mastercard, Visacard, China’s Union Pay- but at less
service charges.
 Works in 3 channels: ATM, PoS, Online. Used by banks, railway and
even dairies. Rupay debit card given free with PMJDY (Jan Dhan)
Bank account.

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FASTag for paying toll fees at highways (2017)

FASTags are prepaid rechargeable tags that allow for automatic toll
collection at electronic toll collection gates using Radio-frequency
Identification (RFID)technology.
 2013 onwards Govt required vehicle manufactures to install RFID
tags on windscreens.
 2017: National Highways Authority of India (NHAI, a statutory body
under Highways ministry) launched 2 mobile apps MyFASTag and
FASTag Partner to facilitate Electronic Toll Collection
 Persons loads up ₹ ₹ in his mobile app → actives RFID tag in his car
→ when it passes through highway toll-booth, the money is
automatically deducted = faster traffic movement. (and hidden
benefit: tracking of vehicle theft, criminal’s movement etc)
 FASTag is vehicle specific and once it is affixed to a vehicle, it cannot
be transferred to another vehicle.
 NPCi's National Electronic Toll Collection (NETC) provides
technological support.
 Highways Ministry is also trying to bring inter-operability of the
FASTags i.e. single FASTag can be used for paying ₹
o at State Highways Toll Plaza (under State Governments’
purview) as well as
o at National Highways Toll Plaza (under Union Government’s
purview).
o From 15th January 2020, it shall be mandatory for all vehicles
passing through tolls to have FASTags. Vehicles without
FASTags will have pay up 2x normal rates at toll gates.

Interoperability Problem
Interoperability is the ability of customers to transact across
commercially and technically independent payment platforms.
 Legal complications under Payment & settlement system act 2007,
so, we don’t have full interoperability; we can’t transfer money
between one wallet to another, can’t use wallet to pay all type of
taxes, fees, insurance premiums etc.
 This is an obstacle to ‘cashless-economy’. So, 2018-October, RBI
issued guidelines for interoperability with KYC check, customer
grievances mechanism etc.

RBI guidelines on interoperability

The Reserve Bank of India has released the guidelines for interoperability
between prepaid payment instruments (PPIs) such as wallets and cards
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that will effectively allow users of popular payment wallets such as

Paytm, Freecharge, Mobikwik, PhonePe and PayZapp, among others, to
transfer money from one wallet to another.

As per the guidelines, where PPIs are issued in the form of wallets,
interoperability across PPIs shall be enabled through UPI and where PPIs
are issued in the form of cards, the cards shall be affiliated to the
authorised card networks.

Significance:
The guidelines, while boosting the e-wallet segment, would also ensure
the safety and accuracy of the transfer of money by individuals from one
wallet to another.

The guidelines would also ensure that not only the customer’s money
remains safe but when the transition happens from one e-wallet app to
another, it reflects utmost speed and accuracy for the interoperability to
be effective and efficient.

New Umbrella Entity (NUE) for Retail Payments System (2019)

NPCi is an umbrella entity for retail payments system - it operates in card
payment (RuPay), Money transfer (IMPS), Mobile Apps (UPI, BHIM), ATM
Network (NFS) etc.

2020-Feb: RBI issued a draft proposal, “if any Indian company interested
to compete in this (NPCi-like) retail payment segment, we’ll license them
as new umbrella entity subject to certain Criterion

Idea
More companies like NPCi → more competition → more Innovation and
cheaper services for users. But, still in the draft stage

CARDS (PLASTIC MONEY)

Credit and Debit Cards are popularly referred to as ‘plastic money’.

Card Types based on Payment modality

1) Credit Card
It allows holder to make purchase on credit (=loan), even if he may /
may not have sufficient balance in his bank account at the time of
purchase.

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 Customer does shopping using credit card → bank transfers ₹ ₹ to

merchant from bank’s own funds and later bank recovers ₹ ₹ from
customer.
 Customer can pay entire due amount at once or convert it into
Equated Monthly Installments (EMI).
 Interest rate may be charged depending on billing cycle, grace
period and other terms and conditions
 It allows holder to make purchases upto the extent of the amount
lying in own his bank balance.
 If Credit card used for withdrawing money from ATM, then it’s a
type of ‘borrowing’, so, bank levies interest rate.

2) Debit Card
 Customer does shopping using debit card → bank transfer ₹ ₹ from
customer’s own bank account to merchant. So, if he has insufficient
balance, he may not be able to make purchase. Although nowadays
ecommerce sites allow debit-card based EMIs
 Debit card= shopping ONLYIF you have ₹ in bank balance,
 Debit card can be used to withdraw ₹ ₹ from ATM from your
existing bank balance. So, it’s not ‘borrowing’.

3) Hybrid Card / Duo Card

 Single card containing two chips for 1) credit card and 2) debit
card. So, you don’t have to carry two separate cards. E.g. Indusbank
Hybrid card.

4) Pre-paid card
 It’s a subtype of debit card. While debit card is linked to a given
bank account, a person can buy pre-paid card even without having
account in the given bank e.g. IRCTC’s UBI Prepaid Card which can
be used for buying rail tickets, meals etc. Backend support
provided by Union Bank of India (UBI) and NPCI’s Rupay gateway.

National Common Mobility Card (NCMC, 2019)

 Ministry of Housing & Urban Affairs (MoHUA) got India’s 1st
indigenously developed ‘One Nation One Card Model’ with the help
of NPCi, Bharat Electronics Limited (BEL), CDAC and some banks
with 3 components:

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o NCMC Card: To be issued by banks. Nature can be

Debit/Credit/Prepaid. Can be used for metro, bus, suburban
railways, toll, parking, smart city payments and retail
shopping.
o SWEEKAR: Automatic Fare Collection System.
o SWAGAT: Swachalit / Automated Gate.

Card Types based on Security Features:

 Magnetic Card: 60s technology. Data on magnetic strip. But, such
data can be duplicated, cloned, skimmed while swiping the card =
fraud. So, RBI stopped such cards from 1/1/2019 using powers
under Payment & Settlement Act.

 EMV card: Europay, Mastercard and Visa chip infrastructure

with encryption. RBI had ordered migration in 2013- finally
effective from 1/1/2019. Two sub-types
o EMV-Contact: cards must remain in Point of Sale (PoS)
Terminal during transaction.
o EMV-contactless cards: simply tap the card on terminal using
RFID (radiofrequency identification) technology.

Card Tokenization
 Amazon, Paytm & other sites / app allow users to store their card
information (owner's name, card number, expiry date) so next
transaction can be finished faster without having to re-type those
details.
 But such facility also exposes customer to the dangers of hacking,
privacy, identity theft, misuse so, Tokenization = Token number is
generated for a given credit/debit card.
 Card customer gives the token number during any type of online /
physical shop transaction → so his original card number, its expiry
date etc. are masked/hidden from the third party seller / wallet /
app / portal = more security and privacy. RBI released guidelines
in 2019-Jan.

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ATM and its Types

Automated Teller Machine (ATM) allow bank customer to withdraw
money or check balance without visiting any branch of a bank.
 ATM network works on NPCi’s NFS (National Financial Switch).

1. Bank label: Bank itself owns and operates the ATM network.

2. White label: White Label ATMs are like normal ATM. However, cash
deposit or cash acceptance facility is not permitted at the WLAs.
o At White Label ATM you will not find logo of any bank like ICICI,
SBI etc. You will find logo of White Label ATM operator on these
ATMs.
o An Individual can use their ATM-cum-debit cards, credit card
for the cash withdrawal at these ATMs.
o You can use WLA for cash withdrawal, utility bill payment, mini
statement and PIN change.
o In case of fail transaction while using white label ATM you need
to report to card issuing bank. ATM card issuing bank is
responsible of resolving conflict.
o Cash Management at WLA will be done by sponsor bank.
Sponsor bank will make an arrangement with NBFC for the cash
at respective locations.
o The Grievance Redressal Mechanism will be the same as that of
normal bank ATMs.

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3. Brown Label

4. Micro-ATM
Bankmitra manually makes entries of deposit and withdrawal for
customer. He uses handheld device for using card & Aadhar biometrics.
NPCi’s AEPS technology gives backend support.

MDR
It is the fee that a merchant must pay to his (acquirer) bank for every
credit / debit card transaction. MDR hurts merchants’ profit margin,
discourages them from adopting PoS terminals and QR based digital
payment systems.
 2017-18: RBI puts ceilings on MDR fees to encourage digital
economy
 WEF 1/1/18: Ministry of Electronics & Information Technology
(MEITY) started MDR subsidy to acquirer bank on bills upto ₹ 2,000,
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if payment made via Debit Card/BHIM, UPI/Aadhaar-Pay through a

POS machine or QR “scan & pay” or online mode of payment.
o Scheme valid for 2 years. Direct benefit: Encourage digital
payments ecosystem.
o Indirect Hidden benefit: Datamining of tax evading merchants

Budget-2019: If a firm's turnover >₹ 50 crore → It must provide facility

to accept Rupay debit card and UPI QR code. (Else penalty under Income
Tax Act)
 NO MDR on such transaction. RBI and Banks will absorb this
‘burden’ as a benefit of not handling so much cash. (Payments and
Settlement Systems Act, 2007 rules amended for this part)

MEASURES TO PROMOTE LESS-CASH ECONOMY

Advantages Disadvantages
 Saves cost of printing new  MDR, Interoperability, Fintech
currency (Rs.27 billion a companies evolving more rapidly
year) than legal framework.
 environment  KYC: Aadhar vs privacy debate
 Better efficacy of monetary  Power, telecom infrastructure not
policy updates available everywhere.
 NPA/fraud Surveillance  Government itself must become a
 Better tax surveillance role model first in handling tax,
 checks on fake counterfeit tender, tolls, procurements through
currency terror finance, digital payment.
 targeted delivery of agri-  To encourage digital payment if
loans and subsidies/ DBT: subsidy, tax breaks, lotteries given
Annually ₹ 1 lakh crore can for perpetual time → iscal de icit.
be saved.  Post-Demonetization, digital
 Can save farmers from transactions ↑ but then again ↓ so,
moneylenders, and poor punitive measures = :-(
families from Ponzi  Digital divide, Low financial literacy
schemes. notion of security with holding
 Secure, difficult to steal, physical currency.
time, convenience, financial  Frauds, Card cloning, service fees on
inclusion NEFT / card payments.

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During 2016-17, in the aftermath of Demonetization

 Ratan Watal Committee to Finance Ministry for medium term
recommendations to strengthen digital payment ecosystem.
 Chandrababu Naidu chief ministers’ Committee to PM to promote
digital payment.
 HRD ministry’s Vittiya Saksharta Abhiyan wherein college students
explain people about digital transactions.
 NITI+NPCi launched lottery / cashback schemes for customers
(Lucky Grahak) and merchants (Digi Dhan Vyapar). Government
itself launched further referral bonus, cashback schemes.

Budget-2017: imposed ceilings the cash transactions, provided tax

incentives to companies for using digital transactions, reduced custom
duties on ATM related devices.

Budget-2018: promised to explore blockchain technology [of

cryptocurrencies] for promoting digital economy

Budget-2019: imposed TDS on withdrawal of ₹1 cr/> from a single user

account.

RBI’s Nandan Nilekani Panel (2019: Jan to May)

Nilekani (Ex-chairman of UIDAI) gave total 70+ suggestions. Notable
among them are:

Suggested Reforms @Government

 Under Direct Benefit Transfer (DBT) mechanism, Government
transfers subsidies and payments directly to beneficiaries account
such as MGNREGA or Pahal-LPG subsidy. But, poor people withdraw
cash from bank account entirely because local merchants not
accepting digital payments. So, raise awareness about BHIM-UPI and
its adoption.
 Government’s MDR subsidy expires on 2019-Dec. Extend it for
another 2 years.
 Give companies tax incentives for using digital payments. Reduce the
taxes on the devices required for digital payments.
 Government organizations should not charge convenience fees from
citizens while accepting digital payments. GSTN portal should allow
card payments.
 National Common Mobility Card (NCMC): Allow its usage in all
transit routes and PoS. Remove Know your customer (KYC)
document requirement in NCMC-wallet subject to monthly ceilings.
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Future mobiles may have NFC technology, then cards may become
redundant anyways.
 Setup Computer Emergency Response Team for finance (FIN- CERT).

Suggested Reforms @RBI

 RBI should prepare area wise ‘Digital Financial Inclusion Index’ to
monitor progress & take remedial steps. Ensure no user is more than
5 kms away from a banking access point. Local vendor should be
made Banking Correspondent (BC).
 Setup an Acceptance Development Fund to develop digital payment
infrastructure in poorly served areas e.g. subsidy on PoS devices. RBI
and Banks should co-contribute ₹ ₹ in this fund.
 Reduce the MDR / card payment fees. Allow customer to do “x” no. of
digital payment transactions per month with no charges.
 Regulatory Sandbox / controlled environment to test innovative
products / services before their mass-deployment.
 RBI should make NEFT available 24/7 and remove charges on its
usage. (2019-June: RBI removed charges on both NEFT and RTGS
and asked the banks to pass on the benefits to customers.)

Suggested Reforms @NPCi

 NPCI should offer RuPay and BHIM UPI in other countries to
facilitate remittance to India.
 Encourage local language apps/ software for digital payments.

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Acceptance Development Fund

Recently, RBI announced setting up of Acceptance Development Fund to
improve the last- mile payments network in rural India to transact
digitally.

 It will be operationalized as a bank-sponsored development fund

solely to improve payment infrastructure in Indian small towns and
villages especially in Tier III to Tier VI centers, where most daily
transactions are in cash.

 The proposed fund will have all major banks and payment
companies transferring a percentage of their proceeds from fees
accrued from processing digital payments called the Merchant
discount rates, or MDR.

 This was indicated in the Payment System Vision Document 2021 of

RBI and also recommended by the Committee on Deepening of
Digital Payments (Chaired by Nandan Nilekani).

Payment Regulatory Board (PRB)

 1998: Narsimhan-II Committee on Banking Reforms suggested
regulatory framework for e-banking, card payment etc.
 2007: Payment & Settlement Systems Act → RBI → (Statutory)
Board for Regulation and Supervision of Payment and Settlement
Systems (BPSS). All payment system providers have to register with
RBI’s BPSS- whether bank, non-bank, wallet/Prepaid Payment
Instrument (PPI) etc.
 2016: Ratan Watal Committee on digital payment suggested
replacing this BPSS with a Payments Regulatory Board (PRB) in RBI,
to look after Interoperability, Consumer protection, Innovation, R&D
in digital payments.
 2018: draft Payment and Settlement System Bill to implement it.

But, RBI vs Government difference of opinion about who should be

chairman, how many members from Government side etc.

Payment and Settlement Systems in India: Vision 2019 – 2021

RBI published this document in 2019-May:
 Core theme of ‘Empowering Exceptional (E)payment Experience’

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 It aims for ‘Highly digital’ and ‘cash-lite’ society through

Competition, Cost effectiveness, Convenience and Confidence (4Cs).
36 specific action points and 12 specific outcomes.
 Setup 24/7 helpline, deadline for card frauds, require payment
service provides to setup internal ombudsman.
 Focus USSD and feature phone based digital payments. Encourage
domestic production/ innovation for Point of Sale (PoS) terminals
etc.
 Extend NEFT for 24/7 basis.
 Increase the international acceptance of Rupay cards.

Digital Transactions Ombudsman (2019)

 RBI designates senior RBI officials at 21 places across India as DTO
 They hear customer complaints upto ₹ 20 lakh against prepaid
payment instruments, Mobile wallets, Apps, NEFT/RTGS and other
digital transactions.
 They can order the company / bank to revert /settle the transaction
and pay upto additional ₹ 1 lakh for mental agony of customer.
o Higher Appeal to Dy.Gov of RBI.
 If matter > ₹ 20 lakh, then matter outside his jurisdiction. Victim has
to approach ordinary courts /consumer courts depending on the
case matter.

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CRYPTO-CURRENCY & BLOCKCHAIN TECHNOLOGY

Blockchain: A secured decentralized database that maintains a
continuously growing list of records / transactions. Old entries can’t be
deleted, new entries will be visible to all. Mainly used for running
cryptocurrency network.

Anarchist groups lost faith in FIAT MONEY because Subprime Crisis

(2007) eroded the purchasing power of US Dollar. They also dislike BANK
MONEY /DEPOSIT MONEY because of transaction charges on e banking,
card payments, MDR, interoperability issues.

 2009: An anonymous user Satoshi Nakomoto launched a

cryptocurrency ‘Bitcoin’, total 21 million coins
 Ethereum, Litecoin, Digicoin, Laxmicoin, Ripple etc. are also
cryptocurrencies

Cryptocurrency legality in India & elsewhere

 India is neither the first nor the only country to ban
cryptocurrencies. Nepal, Bangladesh, Morocco, Algeria, Equator,
Bolivia et al already banned it.
 Since 2013, RBI had been warning people. 2018: RBI directed all
banks/PPP/mobile-wallet cos. to stop relations with any
Cryptocurrency company.
 However, RBI’s Institute for Development and Research in Banking
Technology (IDRBT)- studying how to use blockchain technology for
promoting digital economy.
 2017: Dinesh Sharma Committee to FinMin suggested total ban on
cryptocurrencies. But activists challenged in SC. So Government sets
up new Committee. Subhash Chandra Garg committee to FinMin has
been working on Draft law & framework for cryptocurrencies. Both
Dinesh & Subhash were Secretary in Department of Economic
Affairs.
 2018: Budget says Crypto-currencies are not legal tenders. We’ll
eliminate use of these crypo-currencies in financing illegitimate
activities or as part of the payment systems.

United Nations International Children's Emergency Fund (UNICEF,

HQ- New York, USA; 1946)

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 2019-Oct: UNICEF setup a Cryptocurrency Fund to accept

donations in cryptocurrencies. It has become the first UN
organization to accept cryptocurrency.

World Bank
2018-Aug: World Bank launched World’s first blockchain bond called
“Kangaroo Bonds ” in Australia, denomination: Australian Dollars →
public invests, gets ~2% interest after 2 years.
 Blockchain bond requires less cost in server / database
/paperwork maintenance unlike traditional bonds.

Marshall Islands- Capital Majuro, Sovereign state having free

association with USA (for defense, social security, budget). Legal Tender
was U$D.
 But, - 2018-Feb: became first country to launch sovereign
cryptocurrency named “Sovereign” [SOV]. So, now two legal
tenders: U$D and SOV.
 No anonymity unlike Bitcoins.

Venezuela: Bolivars have little value in Venezuela country due to

hyperinflation, and failed economy.
 So, 2018: President Nicholas Maduro launched “Petro”- a
cryptocurrency whose price is linked with market price of 1 oil
barrel. Their Supreme Court recognized it as “Fiat money – Legal
Tender”.
 Can be bought using Dollar, Euro, even other cryptocurrencies. Sale
began in 2018-Nov.

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