Digital India Costs

By Shivaji Sarkar

There is an uproar over ending a free digital payment regime, UPI, valued at Rs 29 lakh core, to a partially paid one by the merchants above sales of Rs 2000. The Opposition, to shopkeepers to common users are dismayed and question the process.

Perhaps, the government after many years has taken a pragmatic decision in the interest of banks that are extremely stressed since 2016 demonetisation, introduction of Jan Dhan schemes in a tearing great hurry, merger of many public sector banks amid hidden costs and risks, along with severe drain of funds for dividend to the government.

People forget that when UPI was launched in 2016, it wasn’t free. There were uniform merchant discount rate (MDR) charges of 0.065percent on all transactions. Despite being a new product and charges, it grew rapidly. It was only in April 2020, during the Covid19 lockdown, that UPI and other digital payments were made free.A steep fee to save banks.

Over the years, there is a depositsqueeze. Credit growth outpaces deposit mobilisation as household savings shift to mutual funds and equities. An intense competition for retail deposits pushes up interest expenses for lenders, who are stretched into high-risk retail loans to protect net interest margins, raising credit costs.

Gradually, the banking system realises that replacing cost with digital money has not been as pragmatic as envisaged. The cost is swelling.Digital banking, once promoted as a cost-saving and frictionless alternative to cash, has increased expenses. Banks have replaced the physical costs of vaults and cash transportation with continuous spending on cybersecurity, fraud prevention, ageing legacy systems, AML and KYC compliances, and dependence on cloud providers, payment networks and software vendors.

Digitalisation has not eliminated banking costs; it has shifted these from physical cash management to an expensive and endless technology burden.Nor has it reduced the printing of paper money. Compared to 2016, in 2026 currency notes in circulation more than doubled. India had approximately 90.26 billion individual currency notes in circulation in 2016 worth Rs 15.4 lakh crore, costing Rs 3420 crore. It grew to around 176 billion individual pieces by March 2026 valued at Rs 41.23 lakh crore costing Rs 4875.2 crore.Undoubtedly, digital transactions have added high cost and logistics to the banking system.

Banks, The NPA & Credit Risks

Overtly, however, India’s banking system appears healthier than it has been in years. Non-performing assets (NPAs) have fallen, capital buffers remain comfortable and profitability has improved. Yet beneath these reassuring numbers, a different set of pressures is building. Banks face rising deposit costs, changing lending patterns, expanding digital infrastructure expenses and risks.

The Reserve Bank of India’s June 2025 Financial Stability Report placed the gross NPA ratio of scheduled commercial banks at 2.3 per cent and the net NPA ratio at 0.5 per cent at the end of March 2025. Its subsequent Report on Trend and Progress of Banking in India 2024–25 put the gross NPA ratio at 2.2 per cent at the end of March 2025 and 2.1 per cent at the end of September 2025.

But a falling NPA ratio does not mean that credit risks have disappeared. During 2024–25, scheduled commercial banks added approximately Rs 2.26 lakh crore in fresh NPAs. Reductions totalled about Rs2.75 lakh crore, including Rs1.58 lakh crore through write-offs and nearly Rs67,693 crore through recoveries, as per the RBI.Write-offs should not be confused with cash recovery. Lower NPAs are welcome, but the quality of resolution matters.

Deposits: Funding Costs Rise

Credit demand remains strong, while banks face tougher competition for deposits as households shift towards mutual funds, equities and other financial assets. This raises funding costs, forcing banks to offer attractive deposit rates when lending rates cannot rise proportionately. The RBI’s 2024–25 report recorded deposit growth of 11.1 per cent and credit growth of 11 per cent in FY25, highlighting the importance of stable, low-cost deposits.

Rising funding costs are also squeezing net interest margins (NIMs), which declined from 3.3 per cent to 3.1 per cent during the comparative period, increasing the cost of expanding credit.

For banks, especially those dependent on retail deposits, this is not merely an accounting concern. It affects the cost of expanding credit.

Jan Dhan Inclusion Pressure

The Pradhan Mantri Jan Dhan Yojana has transformed access to formal banking. As of February 28, 2025, it had 54.97 crore accounts, including 30.60 crore held by women. Rural and semi-urban accounts accounted for 36.59 crore.

Basic savings accounts without minimum balance requirements generate limited direct fee income. Low-balance or inactive accounts or remote area operations add to administrative workloads.This does not make Jan Dhan a banking failure despite about six crore nil balance accounts. It highlights a policy question:who should bear the continuing cost of universal financial access?Digital automatically does not improve financial efficiency.

Long-Term Loans Hit Banks

The relationship between long-term credit risk management and bank profitability over an extended 17-year period shows an inverse relationship. When banks experience a high volume of credit accumulation or inefficient risk management over a 17-year horizon, their profitability is significantly harmed.

Loan types that stretch across long-term horizons (typically 15 to 20 years, averaging a 17-year lifecycle), are hitting commercial bank balance sheets primarily through various consortium loans.With deposits growing slower at around 12 percent, banks are heavily prioritising high-yield corporate capex and working capital loans rather than oversaturating long-term locked retail assets.

Digital Banking: Efficiency with New Liabilities

Digital banking brings rising costs in cybersecurity, cloud systems, fraud detection and compliance. Card and internet frauds accounted for 66.8percent of cases, while advances-related frauds comprised 33.1percent of the amount involved. Risks are shifting across retail, microfinance, agriculture and real estate, with bank–NBFC linkages potentially spreading stress. The RBI stress tests projected 2.5percent gross NPAs by March 2027—but this is only a scenario, not a forecast.

India’s banks have stronger capital and improved asset quality, with the RBI reporting a 17.4percent capital-to-risk-weighted-assets ratio in March 2025. But financial stability goes beyond NPAs and capital. Deposit costs, recoveries, cybersecurity, digital infrastructure and off-bank credit risks matter. The real test is whether banks remain profitable, protect depositors and withstand changing economic conditions.

Digital transactions should gradually be discouraged. It has not reduced physical currency circulation though exponentially added to the costs to banks. Its risks are known but agencies are wary speaking about it. A higher fee and more caution as well as going back to cash is more welcome and the myth of black money is already busted. — INFA