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UPI: A Game Changer for Financial Inclusion in India

One of the main objectives behind bank nationalization in 1969 was to make banking services readily available for the priority sectors and marginalized classes. However, despite 50 years since bank nationalization, financial inclusion is still a challenge for the Indian economy. When individuals and businesses have easy and equitable access to affordable banking services, we can say that the objective of financial inclusion has been achieved. The primary functions of a bank are to accept deposits, facilitate transactions and provide loans. The level of financial inclusion in a country can be judged by observing how easy and equitable it is to get these banking services. The Sustainable Development Goals (SDGs) have accepted that financial inclusion will play an essential role in achieving eight of the seventeen SDGs. Financial inclusion supports economic development by bringing economic stability, savings mobilization and boosting government revenue.

India witnessed a digital revolution with the availability of cheap and affordable smartphones and high-speed mobile data. Due to this digital revolution, smartphones have become affordable and there is a boom in new FinTech services aimed to improve India’s payment systems. In 2016, the National Payments Corporation of India (NPCI) developed the Unified Payments Interface (UPI) to facilitate online payments. UPI is real time payment system which facilitates inter-bank transactions in India. It enables instant money transfer between any two bank accounts on the mobile platform without the need for any details such as bank account number or IFSC code. The features like using a mobile number as a UPI ID for money transfers instead of a bank account number and payments through a QR code using smartphones made UPI user-friendly. The success of UPI can be ascertained from the fact that in 2018-19 UPI transactions overtook debit card payments in the country. In November 2022, 376 banks were live on UPI. A total of 7,309.45 million transactions to the tune of Rs 11,90,593.39 crores were performed via UPI. Since its launch, the volume and value of UPI transactions have shown an increasing trend.

To capture the country’s financial inclusion level, the Reserve Bank of India constructs a composite Financial Inclusion Index (FI-Index). The index captures information on various aspects of financial inclusion ranging between 0 and 100, where 0 represents complete financial exclusion, and 100 indicates full financial inclusion. The FI-Index is comprised of three broad parameters: 1) Access to financial services having a weightage of 35%; 2) Usage of financial services, having a weightage of 45%; and 3) Quality of financial services, having a weightage of 20%. The FI-Index for March 2021 rose to 53.9 from 43.4 in 2017. It further improved to 56.4 in March 2022. UPI plays a crucial role in financial inclusion in India by providing access to digital financial services to a large segment of the population, which includes the rural population and unorganized sector. With UPI, people can easily send and receive money, pay bills, and make other transactions using their mobile phones. This has helped to increase access to financial services, particularly in rural and remote areas. Both the volume and value of UPI transactions have increased continuously since its launch. In the year 2022 approximately 74 billion transactions worth Rs 125.94 trillion were conducted using UPI and more than 38 billion transactions valuing Rs 71.54 trillion in 2021. Thus, financial inclusion is improving in India, and UPI plays a significant role in it.

Author - Prof. Ashutosh Pandey