Fix UPI, forget ULI

Physical cash is ceding place to digital cash everywhere. In India, the unified payment interface (UPI), at about 550 million transactions a day, leads the transition. UPI’s growth, however, is plateauing with monthly transactions between 15.5 to 17 billion in the last five months.

The UPI system is facing many outages. Many policy issues — concentration of fintech players, payment of merchant discount rate (MDR), etc. — are also constraining UPI’s growth.

What is the right policy fix for UPI?

The unified lending interface (ULI), launched on August 26 to provide ‘frictionless credit’ and a UPI in the credit space, has had a tepid turnout, disbursing less than 0.1% of the credit disbursed by commercial banks.

Should ULI be forgotten?

UPI — India’s masterstroke

Payment systems keep transforming. Coins, which ruled during the agricultural age, were replaced by banknotes when the industrial economy swept the world. Digital payments are now relegating coins and paper currency to the margins in a rapidly expanding digital age.

In most countries, credit and debit cards, QR codes, and mobile payments ushered in the big change. India, instead, came up with a different solution—UPI. By converting all bank accounts into one single mega digital bank, UPI made even small payments instant, costless, and frictionless.

With the payment emerging in recipients’ accounts instantly, UPI has quickly earned the confidence of millions of vendors — there are more than 670 million QR codes in India now.

Widespread acceptability of UPI is reflected in its growth at a breakneck speed. Between 2018-2019 (5.39 billion) and 2023-2024 (131.13 billion), UPI transactions grew at a CAGR of 89.3%.

A job to finish

While still high and respectable, UPI’s growth is slowing. In 2023-2024, UPI transactions recorded a growth of 56.6% and in 2024-2025, at 185.9 billion transactions, a growth of 41.7%.

In H22025, there is virtually no month-on-month growth. The UPI system is also reporting uncomfortably large outages, leading to millions of transaction failures.

Technical glitches will surely be fixed soon, but the battle to replace cash, however, is not over yet. As we have no good measure of this challenge — the Reserve Bank of India (RBI) conducts no survey and provides no estimates of cash transactions taking place—so, let’s make an estimate.

In 2023-2024, the value of UPI transactions was Rs 200 trillion. In 2024-2025, more than Rs 250 trillion worth of UPI transactions are likely to take place.

Currency in circulation (cash) in February was Rs 36.16 trillion. As cash is expected to roll over (velocity of money) about seven times a year, an estimated Rs 250 trillion worth of cash transactions, take place in a year — almost at par with UPI transactions.

Evidently, UPI has a big job to finish.

Let RBI absorb service cost

UPI transactions are conducted through a fintech interface, with PhonePe and Google Pay commanding more than 80% share. The RBI, to limit a player’s share to 30%, fixed a deadline, which, being impractical, had to be postponed. This is an artificial prescription and should be abandoned. Let competition emerge in the market. In the meantime, let UPI expand on the strong technical shoulders of incumbents.

There is another bigger policy problem, permitting the financial system (including fintech players) to charge a fee to compensate for their costs. The government has abolished MDR, which discourages many players from expanding UPI services. The government does provide an incentive of 0.15% for UPI transactions of less than Rs 2,000, which is estimated to cost the government Rs 1,500 crore in 2024-2025.

The UPI system provides enormous cost savings to the RBI, as these transactions reduce cash, thereby helping the central bank print fewer currency notes. The RBI spent Rs 5,101 crore on the printing of currency notes in 2023-2024. While the industry wants an MDR of 0.3%, which will cost Rs 75,000 crore a year, if the RBI were to pay an incentive of 0.02% on all UPI transactions for supporting installation and maintenance of the UPI infrastructure, it will cost only Rs 5,000 crore a year.

For the RBI, it is a pittance and a cost like the management of the cash system. The RBI must pay, and the government must discontinue its scheme. This will end the debate about MDR and make UPI payments equivalent to cash payments.

In addition, it is time for the government to replace all cash transactions with UPI and mandate the banks to levy a service charge on cash withdrawals and deposits of more than, say Rs 10,000.

These measures will ensure that UPI becomes synonymous with payments in India, bringing the share of cash payments to less than 10% in 10 years.

Junk ULI

ULI facilitates lending by bringing all credit and relevant databases, like the GST together. While it facilitates assessment of credit risk, the bank must still make many decisions — whether to grant a loan or not, how much and for what tenure, conditions related to interest, repayment etc., among others.

No degree of digital automation and connectivity can standardise and substitute this decision-making. The expectations from ULI must, therefore, be tempered down. Let this interface be available to people to apply, and banks to process it, generating all related information from the interface.

ULI can never be a PLI in the lending space.

(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream Dented’, ‘Commentary on Budget 2025-2026’, and ‘We Also Make Policy’.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.