THE CONTEXT: UPI processed 18.3 billion transactions worth ₹24.8 trillion in March 2025 alone, yet the rail suffered three nation-wide outages in March-April 2025, triggering policy scrutiny and public concern. Disruptions raise questions about system resilience, governance, and the sustainability of India’s digital public infrastructure.
THE BACKGROUND:
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- Launched: April 2016 by NPCI under RBI’s guidance.
- Design: Interoperable, real-time peer-to-peer network built over Immediate Payment Service (IMPS) rails.
- Ownership: NPCI is a consortium primarily held by public sector and private sector banks.
- Legal Framework: Payment and Settlement Systems Act, 2007.
ANATOMY OF THE MARCH–APRIL 2025 OUTAGES
| Immediate trigger | Root cause | Structural factor |
|---|---|---|
| Bulk “check-transaction” calls by two large banks overwhelmed NPCI API rate limits | Inadequate API-throttling & cascading retries | Centralised switch – SPoF |
| PSP fail-over mis-configs led to infinite retries | Weak real-time monitoring & circuit-breakers | Uneven PSP-bank SLA enforcement |
| Scheduled capacity patch postponed due to FY-end freeze | Governance lag: NPCI = Section 8 non-profit majority-owned by PSBs | Public-private partnership without explicit prudential capital mandate |
BANK-NPCI DYNAMICS
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- Banks face rising SMS costs and data compliance burdens without direct revenue from UPI.
- Ministry of Electronics and IT’s UPI Subsidy Scheme rewards high-performing banks but penalties remain limited.
- NPCI exploring NPCI Bharat BillPay and NIPL (NPCI International Payments Ltd.) expansions for diversification.
REGULATORY & POLICY FRAMEWORK FOR UPI RESILIENCE AND RELIABILITY
1. Payments Vision 2025 (RBI, 2022)
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- Objective: Achieve 99.9% system availability across digital payment ecosystems.
- Provisions:
- Geo-tagged downtime analytics to trace outages to specific locations and networks.
- Auto-reversal standards: Mandates refund of failed transactions within T+1 working day.
- Push for offline digital payments (e.g., UPI Lite, UPI 123Pay) to improve rural penetration.
- Significance: Embeds financial resilience into India’s G20 Presidency Digital Economy priorities.
2. Cyber Security Framework for Banks (RBI, 2016)
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- Mandates: Real-time monitoring of critical payment systems including UPI.
- Requirements:
- Banks must create Security Operations Centres (SOCs).
- Quarterly audits of payment apps and core banking systems (CBS).
- Impact on UPI: Mandatory encryption of transaction data and multi-layered risk controls.
- Gap: Enforcement around UPI-specific SOC alert systems remains weak; minor penalties levied.
3. Turn Around Time (TAT) Harmonisation Guidelines (RBI, 2019)
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- Provision:
- Compensation of ₹100/day if refunds for failed UPI transactions are delayed beyond T+1.
- Reality Check:
- Despite mandates, customer grievance redressal remains patchy.
- NPCI Ombudsman for UPI still lacks independent statutory backing (pending under RBI’s draft Digital Ombudsman Framework, 2024).
- Provision:
4. MeitY’s Incentive Architecture (“Carrot-and-Stick” Model)
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- Design:
- Banks’ share of UPI subsidy disbursements linked to their uptime quartile rankings.
- Top quartile (best-performing banks): Get full subsidy reimbursement.
- Bottom quartile (laggards): Zero reimbursement.
- Purpose:
- Push lagging banks to upgrade server infrastructure, transaction monitoring, and fallback mechanisms.
- Latest Development:
- ₹2,000 crore earmarked under Digital Payments Incentive Scheme (2023–26) with 10% bonus for rural UPI growth.
- Design:
5. Zero MDR Policy and the RBI Discussion Paper (2022)
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- Background:
- In 2020, MDR (Merchant Discount Rate) for UPI transactions was waived to enhance financial inclusion.
- RBI 2022 Paper:
- Proposed tiered MDR based on merchant turnover, ticket size, and type of payment (e.g., peer-to-peer vs peer-to-merchant).
- Current Status:
- Government decided to retain zero MDR for UPI and RuPay to encourage mass adoption, especially among small merchants.
- Challenge:
- Banks and Payment Service Providers (PSPs) bear back-end costs without transaction fee income — impacting sustainability.
- Background:
6. Other Complementary Initiatives
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- NPCI High Availability Project (2025 target): Create mirrored secondary hubs (East and South India) for UPI transactions to improve resilience.
- Digital Payment Security Control Guidelines (RBI, 2024 Draft): Standardize data storage norms, consent frameworks, and mandatory fraud detection systems across PSPs.
- Payments Infrastructure Development Fund (PIDF) Expansion: ₹614 crore corpus to subsidize UPI PoS terminals in Tier III and below cities.
IMPLICATIONS FOR GOVERNANCE:
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- Trust in Digital Public Infrastructure (DPI): Repeated disruptions erode user confidence, risking cash-backlash.
- Fiscal & Monetary Transmission: Government DBT and retail-CBDC pilots depend on uninterrupted UPI rails.
- Competitive Neutrality: Persistent downtimes give legacy card networks (Visa/Mastercard) relative edge, diluting Atmanirbhar digital strategy.
THE ISSUES:
1. Single Point of Failure (SPoF) Risk
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- Vulnerability: No fully operational mirrored Disaster Recovery Centre (DRC) yet at transaction scale despite Payments Vision 2025 goals.
- System-wide outages ripple across PSPs (Google Pay, PhonePe, Paytm) simultaneously.
2. Lack of Binding & Transparent SLA Regimes
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- Reality:
- NPCI publishes uptime data monthly.
- However, bank-wise PSP latency and failure rates are opaque to consumers and merchants.
- No automatic penalties or regulatory triggers during bank-specific failures → Poor deterrence.
- Reality:
3. Bank Disincentives and Zero MDR Challenge
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- No Merchant Discount Rate (MDR) permitted for UPI since 2020 under Digital Payments Promotion Policy.
- Banks incur ~₹0.80 per UPI transaction (RBI, 2022) → SMS alerts, server upkeep, fraud management.
- No direct revenue; subsidy payouts (MeitY Digital Payment Incentive 2023) linked to uptime quartile, not profitability.
- Infrastructure modernisation may lag without sustainable incentive alignment.
4. API Governance and Protocol Gaps
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- Technical Deficit:
- Transaction status APIs often lack throttling.
- Circular retries (“resend storm”) by payer banks during downtimes overload NPCI servers.
- Technical Deficit:
5. Cyber-Resilience and Data Localisation Compliance
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- Post-RBI Master Directions (2018):
- All payment data must be stored only in India (Data Localisation mandate).
- Challenges:
- Significant compliance cost (~12% jump in IT budgets; NASSCOM 2023).
- Growing cyberattack surface with 24/7 UPI access points (smartphones, IoT devices, QR codes).
- Emerging Threat: AI-powered phishing targeting UPI authentication flows (CERT-In Advisory 2024).
- Post-RBI Master Directions (2018):
6. Digital Divide and Inclusion Backlash
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- Reality Check:
- NSSO 78th Round (2023): Only 31% rural households have active internet.
- Problem:
- Small kirana shops, local artisans increasingly rely only on UPI-QR.
- No cash fallback during systemic outages → direct liquidity shocks.7. Transparency and Consumer Grievance Gaps
- Reality Check:
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- No real-time public dashboard tracking transaction declines, partial failures or bounce-backs. RBI Ombudsman framework addresses end-issues but lacks pre-emptive outage alerts.
THE WAY FORWARD:
| Dimension | Solutions |
|---|---|
| Technical Resilience | • Active Multi-Zone Redundancy: Implement multi-cloud, real-time replication across three geographically distinct zones (adopt NCI-DC, 2024 norms) to eliminate single-point failures. • API Throttling & Circuit-Breaker Norms: Introduce NPCI’s “UPI v3.0” API specifications ensuring automatic de-prioritisation of non-critical status check floods during peak loads. (Inspired by Fedwire ISO 20022 standards.) |
| Economic Realignment | • Micro-Interchange Model: From FY26, permit ≤0.1% micro-fee on UPI merchant transactions above ₹1000, funded by a MeitY Digital Payments Growth Voucher. • Reliability Insurance Fund: Set up a Digital Payments Redundancy Fund (₹0.005 levy/transaction) modeled after DICGC, underwriting banks’ infrastructure capex for disaster-proofing UPI nodes. |
| Regulatory Oversight | • SIPU Classification for NPCI: Elevate NPCI as a Systemically Important Payment Utility under RBI oversight, with minimum net-worth norms (e.g., ₹2000 crore) and stress-test mandates. • Bank-level Public Uptime Reporting: RBI and MeitY to mandate bank-specific quarterly uptime dashboards linked to incentive disbursements and Basel-III operational risk buffers. (As in Singapore MAS frameworks.) |
| Innovation Pathways | • Expand UPI Lite-X and Tap-Pay: Decongest core switches by scaling offline and NFC UPI options for sub-₹500 payments in low-bandwidth zones. • Decentralised Settlement Pilots: Trial Permissioned DLT-based local clearinghouses (like Project Ubin-Singapore) for low-risk, low-value P2P transactions. |
| Global Linkages & Best Practices | • Cross-border Redundancy: Fast-track UPI integration with FedNow (US), PIX (Brazil), and PayNow (Singapore), adopting ISO 20022 messaging for redundancy. • Emergency Routing Protocols: Design “fail-over” automatic redirection via partner systems during NPCI-level outages. (Learning from SWIFT’s Alliance Cloud Resilience Framework.) |
| Capacity-Building & Cyber Hygiene | • Mandatory SANS Top-20 Controls: Compulsory adoption of best-in-class cybersecurity controls, quarterly Red-Team testing by CERT-In empanelled agencies. • UPI Secure Scorecard: Introduce an NPCI-driven ‘UPI Secure Score’ publicly ranking banks and PSPs based on cybersecurity, uptime, responsiveness. (Similar to UK’s FCA ScamSmart ratings.) |
THE CONCLUSION:
Strengthening UPI’s “public good” credentials now demands a calibrated mix of redundancy engineering, incentive realignment and transparent oversight. Delivering 99.99 % “always-on” reliability will not only safeguard India’s digital‐inclusion gains but also fortify ambitions to export UPI as a benchmark Digital Public Infrastructure (DPI) to the Global South—turning resilience into a strategic soft-power asset.
UPSC PAST YEAR QUESTION:
Q. What is the status of digitalization in the Indian economy? Examine the problems faced in this regard and suggest improvements. 2023
MAINS PRACTICE QUESTION:
Q. The resilience of digital payment systems like UPI is critical for India’s financial inclusion and digital economy goals. Examine the challenges in ensuring uninterrupted UPI services and suggest a multi-pronged strategy to enhance systemic robustness.
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