India’s run for a digital payment and banking system

By Abhinash & Indra Giri on December 15, 2016
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This study is aimed to examine the existing digital payment system and Indian banking and opportunity for Near Field Communication (NFC) POS machines market in Uttar Pradesh, India. On the basis of the market research, it can be said the digital payment system in India is in its initial phase and is picking up the pace. It is expected to increase further after the demonetization of the Indian currency on 8th November 2016.

Existing banking scenario in India

The Indian banking system is one of the well regulated and sufficiently capitalized. As per the Reserve Bank of India (RBI), the distribution of the banking industry is as follows :

Types of Bank
Total number of banks
Public Sector banks 26
Private sector banks 25
Foreign banks 43
Regional rural banks 56
Urban cooperative banks 1589
Rural cooperative banks 93550

Different types of banks in India (Source RBI, 2016a)

Even though the number of banks in the public sector and the private sector is almost the same, public sector banks capture a majority of the market. According to the Reserve bank of India, more than 70 % of the market is captured by the public sector banks which leave only a small share for the (RBI, 2016). The total assets or liabilities of Indian banks for the financial year 2014-15 was Rs 120370 billion and total deposits were Rs 94338 billion. Similarly, net profit in the same period of the entire banking industry was Rs 981 billion with a return on assets of 0.8%.

One of the major problems faced by the Indian banking sector is the increasing amount of Non-performing Assets (NPA). The gross non-performing assets increased from Rs 3233 billion in 2014-15 to Rs 6000 billion in 2015-16 (RBI, 2016a).

The banking industry in India is one of the fastest-growing sectors in India. However, financial inclusion has not been very effective. According to the World Bank data between 2011 and 2014 175 million bank accounts has been opened. However, as compared to the Indian population, the increase is not very promising. The data also shows that there are only 13 banks and 18 ATM machines for every 1 lakh ( 0.1 million ) people in India (The World Bank, 2015).

Financial inclusion through Pradhan Mantri Jhan Dhan Yojana

The banking facilities in India was restricted to a very low percentage of the population till 2014. To promote financial inclusion, the current Government of India introduced a new scheme, Pradhan Mantri Jhan Dhan Yojana. Under the scheme, people can open their bank account without any balances. In other words bank account under this scheme does not have any minimum balance requirement as normally required by other accounts. As per the latest data, till the end of November 2016 257.8 million, Jhan Dhan accounts were opened (Ministry of Finance, 2016). It has been estimated that more than 99% of the households in India now have at least one bank account.

Demonetization and the road to a digital payment system

On the 8th of November, 2016, the Indian Prime Minister Narendra Modi announced that the Rs 500 and Rs 1000 rupees notes will not be legal tender anymore. As per the Reserve bank of India data, the 500 and 1000 rupee notes constituted more than 85% of the total currency in circulation. The total value of such notes was Rs 16 trillion (RBI, 2016b). The government of India has asked its citizens to deposit the old notes into their bank accounts and withdraw money in new notes. Till the first week of December around Rs, 11 trillion rupees were deposited in banks (Business Standard, 2016). The government has issued new 2000 rupee notes in circulation to maintain the cash flow in the economy. However, there is a cap on the maximum withdrawal one can make within a week (Livemint, 2016). It is expected that it will help to curb black money which was stashed as cash. Similarly, the problem of fake currency and terrorism is also expected to reduce.

Comparison of the different methods of payment in Indian banking before and after demonetisation
Comparison of the different method of payment before and after demonetisation

However, on the other hand, it will have a negative impact on the aggregate demand and investment in the country. India is one of the largest cash-based economies where more than 60% transaction is done through cash. So after demonetization with limited cash supply, this transaction will not take place as earlier.

One solution to solve the problem of limited cash flow is to focus on digital payment systems. Digital India has been one of the major projects of the current government and the demonetization has given a much needed “Big Push” to this initiative. Since there is a maximum limit one can withdraw from bank accounts, digital payment is one of the best solutions.

On one hand, digital payment will help to keep a track of every transaction in the economy, hence reduce the chance of tax evasion. On the other hand, digital payment is also more efficient and easy as compared to cash transaction. However, it is the responsibility of the government to provide the basic infrastructure to make India digital such as a stable power supply, internet and banking system within the reach of every citizen. Another import factor where the government should focus is on educating people about various digital payment options and focus more on making India a more educated society.

Existing digital payment systems in India 

Since banks have received a huge amount of money as deposits, it is important to bring that money into the economy. If that does not happen for a long period of time the economy will face serious problems. So in this section, the existing digital payment system has been reviewed and analysed whether the existing system is able to handle such a huge amount of deposits or not.

Debit cards

While paying through debit cards payment amount directly deducted from their bank accounts. This is one of the most popular payment systems in India. However one can use only that amount which he/she has in their bank account.

Number of Debit , credit and POS machines in India
Number of Debit, credit and POS machines issued in India

As per the latest data by RBI, there is a total of 710 million debits cards in India till August 2016. Similarly, the data also suggest that on average the total number of transactions in ATM (in a month) is about 75 million. On the other hand with the total number of transactions in POS (point of sale) machines is 130 million. The total value of such a transaction is Rs 180 billion. So, on average, every transaction in the POS machine is Rs 1384. On the other hand, the average number of transactions per debit card in India is 0.2 transactions per month (RBI, 2016).

Credit cards

According to RBI until August 2016, there were a total of 26 million credit cards issued in India. The total number of transaction in an ATM using a credit card is 0.64 million. This is because one has to pay interest if they withdraw cash using the credit card and the interest rate is also high. On the other hand, the total number of transaction in POS machines were 83 million (for the month of August). The total value of such transactions is Rs 250 billion (RBI, 2016).

Total number or digital payment transactions in POS machines for one month ( 2011- 2016)
The total number of digital payment transactions with POS machines for one month ( 2011- 2016)


E-wallets are virtual accounts that can be maintained on a mobile phone. One can use these wallets to make online payments and online shopping. There has been a significant increase in the e-wallet market in India. This growth in the e-wallet transaction can be attributed to the development of new technology and the increasing use of smartphones. According to the recent report, the total worth of e-wallet transaction in India in the financial year 2015-16 was around Rs 1.54 billion. It is expected to increase to Rs 300 billion between 2016 and 2020 (RNCOS, 2015). This figure is expected to increase significantly because of the demonetization and the government’s plan of transforming India into a cashless economy.

The expected growth of the e-wallet market in India can be realized with the growth of Paytm. It is one of the largest e-wallet providers in India with a  massive 150 million users. After the demonetization, it experienced more than 200% growth in its daily transactions. There were more than 7 million transactions worth Rs 120 crore per day after 8 November. Paytm has already achieved its $5 billion Gross Merchandise Value (GMV) six months before its target. Another important change in the growth of Paytm is that the share of offline business increased to 65% as compared to 15% before six months (The Indian Express, 2016).

Another important player in the e-wallet market in India is Mobikwik which has also grown significantly after the demonetization. Currently, Mobikwik has around 35 million users and after 8th November the number of transactions increased by more than 18 times.

Point of sale machines to facilitate digital payments

It is also important to study the existing market for the next side of the digital payment system. In other words the existing market of the Point of sales machines in India, where the buyer makes the payment to the merchant using debit or credit cards.

As of August 2016, there is a total of 1.46 million POS machines in India. Among them, 70% of the machines are in the 15 big cities. While comparing with the Indian population of 1.2 billion, there are only around 806 POS machines for every one million people (RBI, 2016). This shows the lack of availability of the infrastructure in the digital payment system. Similarly, between financial years 2013-2015, an increase in the number of POS machines were less than half of the increase in the debit cards for the same period (RBI, 2016).

NFC is the latest wireless method that is able to transfer data from one device to another. It has been widely used in the payment system in developed countries. For example, Apple Pay and Google wallets allow the tap and pay services based on the NFC technology. To use the NFC payment system both the parties involved in the transaction should have the NFC chip installed in their devices. For example, to use the NFC technology in POS machines both the machines and the plastic card should be NFC enabled (NFC Forum, 2016).

In India, there has been limited use of NFC technology for making payments.  Some of the banks have started distributing NFC enabled debit cards after 2015.  For example, Visa has issued 1 million NFC cards and 0.1 million NFC POS machines till the end of the financial year 2015-16. State Bank of India (SBI) which is the largest bank in India is planning to convert 100,000 POS machines to NFC out of its 300,000 POS machines. Similarly, ICICI Bank, the largest private sector bank in terms of market capitalization has distributed 900 NFC enabled POS machines in 2015. Also, Axis bank is planning to install 50000 NFC enabled POS machines out of its total 240000 POS machines (Axis Bank, 2015; ICICI Bank, 2016; SBI, 2015).

Uttar Pradesh is a big opportunity for NFC point of sale devices

On the basis of the above findings, it can be said that the digital payment system in India has a huge potential to grow. There are both demographic and economic factors behind selecting Uttar Pradesh as a big opportunity. One of the most important factors is its big population of 200 million with a literacy rate of around 70%. Among the total population, there are around 39 million internet users and the monthly growth rate of wireless subscribers is 1.6 % (Census 2011, 2011). This is one of the highest in entire India.

otal number of Jhan Dhan accounts ( till 7th December 2016)
Total number of Jhan Dhan accounts ( till 7th December 2016)

Another important factor is the current banking penetration in Uttar Pradesh. There is a total of 38 million Jhan Dhan accounts in the state. The total amount deposited in these Jhan Dhan accounts is Rs 119 billion which is one of the highest compared to other states in India (Ministry of Finance, 2016). Most of the amount was deposited after the demonetization. Since a huge amount of money is lying idle in bank accounts, the only solution for bringing it into the economy is through a digital payment system.

Total deposits in Jhan Dhan accounts (till 7th Dec 2016)
Total deposits in Jhan Dhan accounts (till 7th Dec 2016)

The current NFC market in Uttar Pradesh shows that there are only around 2000 NFC enabled POS machines (till 2015) that were distributed by three major banks (SBI, ICICI and Axis Bank). Since NFC is a more secure and time-saving mode of payment, it has great potential to grow in the state (Axis Bank, 2015; ICICI Bank, 2016; SBI, 2015).


I am currently working as a Research Associate. My work is centered on Macroeconomics with modern econometric approach. Broadly, the methodological research focuses on Panel data and Times series data analysis for causal inference and prediction. I also served as a reviewer to Journals of Taylor & Francis Group, Emerald, Sage.