2025

Current Affairs

UPI: Duopoly & Market Vulnerabilities

Context: The meteoric rise of Unified Payments Interface (UPI) since its launch eight years ago, is no small feat for a country like India. As UPI enters its next phase of growth in both reach and innovation, there remain certain challenges to be addressed.

Relevance of the Topic: Mains: UPI- Scope, Risks, Way forward

Present Scenario of UPI in India

Unified Payments Interface (UPI) ecosystem accounts for nearly 80% of digital transactions in India.
UPI transaction value exceeded Rs. 20.60 lakh crore in August 2024 alone.
UPI penetration is at 30% of the population. With India’s low digital literacy and a historic reliance on cash, this is a big achievement.
UPI has played a key role in fostering public trust in digital payments.

Scope for further growth of UPI

Enhancing public trust:
- UPI’s continued success will heavily depend on whether its ecosystem can maintain and build upon such public trust.
- This, in turn, will depend on UPI’s performance on resilience, reliability, and openness to innovation.
Wider reach:
- 70% of the population remains to be brought into the digital payments fold.
Potential for Innovations:
- Expanding reach of UPI will require substantially new innovations ranging from service offerings to app design and the overall product base of the UPI ecosystem.
Scope for new entrants:
- A major hindrance for UPI’s growth is the extreme market concentration of two Third Party App Providers (TPAPs) in the UPI network — Phone Pe and Google Pay.
- Together, they control over 85% of the total market share.
- The next biggest player, Paytm, controls merely 7.2%.

What are the risks posed by Duopoly in the UPI ecosystem?

Increased systemic vulnerability:
- High market concentration of payments systems in PhonePe and GooglePay can lead to single points of failure, where any sudden break in services can have ripple effects across the entire financial structure.
Risk of decreased competition and innovation:
- Disproportionately large share of the market and user base creates high entry barriers for smaller and newer market participants.
- Lack of competition also discourages investment in new innovations.
Risk of foreign dominance:
- Both PhonePe and GPay are foreign-owned (by Walmart and by Google respectively).
- Foreign ownership creates multiple potentially new lines of failure, including data protection and backdoor access to sensitive information of Indian citizens, etc.

Regulative Measures and Recent Developments:

Initial proposal: In November 2020, National Payments Corporation of India (NPCI) proposed that the digital payment firms would not be allowed to hold more than 30% share of the volume of transactions processed via India's popular unified payments interface (UPI). The mandate was to take effect from the end of 2024.
Extension of Deadline: In December 2024, NPCI extended the deadline for compliance by two years to the end of December 2026.
- Recent reports suggest that the NPCI may potentially increase the market share cap from 30% to 40%.
- Presently, Phone Pe accounts for 48.36% and Google Pay for 37.3% of market share in volume, as of August 2024.
Every subsequent extension to the deadline given by the NPCI, with any potential increase in the market share cap, will only allow the dominant TPAPs to consolidate their hold.

Way Forward

Strict implementation of market cap at previously determined 30% to prevent monopolistic tendencies and encourage competition.
Create a level-playing field for Indian entrants to the UPI ecosystem, thus balancing foreign dominance and addressing data sovereignty concerns.
Encourage participation of small and new payment systems.
Ensure data protection, especially financial data handled by foreign-owned companies.
Encourage innovation through increased competition, user-friendly apps and customised user reach.

The UPI ecosystem has every potential to offer smaller market participants a level playing field to compete and innovate with large established players. Providing the right conditions and right incentives is the key, so as to ensure the next phase of growth in both reach and innovation.

India’s Financial System showing Stability & Resilience: RBI

Context: The RBI’s Financial Stability Report released in December 2024, highlights significant improvements in the asset quality of Scheduled Commercial Banks (SCB), with Gross NPA ratios at a 12-year low.

It shows the resilience of India’s financial system, supported by strong capital buffers, improved provisioning and healthy domestic financial fundamentals amidst global uncertainties.

Relevance of the Topic: Prelims: Important Banking-related terms.

RBI’s Financial Stability Report

Published bi-annually by the Reserve Bank of India.
It reflects the collective assessment of the Sub-Committee of Financial Stability and Development Council (FSDC), which is headed by the RBI Governor.
The report evaluates the resilience of the Indian financial system and identifies risks to financial stability.

Important Banking-related Terms

1. Asset Quality Ratio:

Asset quality ratio (AQR) is a key indicator that measures the proportion of non-performing assets (NPAs) to total assets in a bank.
A high AQR indicates that a bank has a large amount of bad assets that are dragging down its performance and posing a risk to its solvency.
A low AQR indicates that a bank has a healthy portfolio of assets that are generating income and interest for the bank, enhancing its profitability and stability.

2. Provisioning Coverage Ratio (PCR):

PCR provides insights into the adequacy of provisions made by banks to cover potential losses on their loan portfolios.
It is calculated by dividing the total provisions held by a bank by its total non-performing loans (NPLs).
It represents the percentage of NPLs that are covered by provisions.
A higher ratio indicates a stronger ability to absorb potential losses.

3. Capital Adequacy Ratio (CAR):

CAR is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities. This is a measure of a bank’s ability to meet its obligations.
A high CAR means the bank can absorb losses without diluting capital.

4. CASA Ratio (Current Account Savings Account ratio):

CASA is the proportion of current account and savings account deposits in the total deposits of the bank.
A low CASA ratio means the bank relies heavily on costlier wholesale funding, which can hurt its margins.

5. Net Interest Margin (NIM):

This is the difference between interest earned by a bank on loans and the interest it pays on deposits.
NIM will be high for banks with higher low-cost deposits or high lending rates.
Low NIM and high NPA is a bad combination.

6. Return on Assets (RoA):

It shows how profitable a bank’s assets are in generating revenue.
A lower RoA means that the bank is not able to utilise assets efficiently.
Negative RoA implies the bank’s assets are yielding negative returns.

7. Capital Conservation Buffer (CCB):

CCB is a concept introduced under the international Basel III norms.
According to Basel III norms, during good times, banks must build up a capital buffer that can be drawn from, when there is stress.
In India, to adhere to Basel norms, RBI wants all the commercial banks to achieve a minimum total capital of 9 per cent and a capital conservation buffer of 2.5 per cent, with the minimum total capital and CCB adding up to 11.5 per cent.

Major Highlights of RBI’s Financial Stability Report

Gross NPA ratio has declined to a 12-year low of 2.6% in September 2024.
Scheduled Commercial Bank’s Net NPA ratio stayed at 0.6%.
Provisioning Coverage Ratio improved to 77% in September, mainly due to proactive provisioning by Public Sector Banks.
Improvement in Return on Assets and earnings before provisions and taxes.
Sequential decline in the net interest margin abetted by shift of deposits to higher interest rate buckets.
Decline in share of low-cost Current Account Savings Account (CASA) deposits.
Increase in share of term deposits, especially for higher interest-rate buckets.