Volume & Value of Digital Transactions significantly affected by lockdown
Sai Krishna Muthyanolla
June 17, 2021
After the advent of IMPS & UPI, the volume of digital transactions has significantly increased in the country and continues to grow. However, the pandemic-induced lockdowns and changing spending patterns seem to have had an impact on digital transactions. Both the volume & value of digital transactions are significantly affected by lockdown measures, as per the latest available government data.
People’s spending patterns have changed during the COVID-19 pandemic. Globally, there has been an increase in household saving rate during the second quarter of 2020 following the pandemic’s vicious toll on economies. Not just that, the pandemic has had a major impact on consumption levels and inequality within India. According to a recent study, the bottom 40% of households had experienced the most severe decline in consumption in the early phase of the pandemic. However, with time, as COVID-19 intensified, consumption declined across all classes of households, especially the middle class. That is, the impact of the pandemic was severe both for the middle class as well as the poor.
What has been the impact of Lockdown measures?
In one of our earlier stories based on RBI’s annual report, it was observed currency in circulation has more than doubled in the last five years despite an increase in digital transactions. According to RBI, in the year 2020-21, a higher-than-average increase in banknotes in circulation was observed due to precautionary holding of cash by the public because of the pandemic and its prolonged continuance. Restricted mobility due to lockdowns and the need to reduce physical contact to avoid infection could have encouraged more people into resorting to online platforms for financial transactions instead of cash. At the same time, severe lockdowns may have had an impact on digital transactions as most businesses except the essential ones were completely shut down. In other words, the lockdown measures while pushing people to hoard more cash also may have impacted digital transactions. We analyse the data on various types of digital transactions to understand if the volume of transactions has grown or shrunk during the lockdown months.
Even prior to that, the BJP led NDA government launched the Digital India campaign in July 2015 with the motive, ‘Faceless, Paperless, Cashless’.  The promotion of cashless transactions and conversion of India into a less-cash society was an important goal of the program. In fact, one of the objectives of the demonetization exercise in November 2016 was to build a less-cash society and encourage people to use digital platforms.
The RBI Ombudsman Scheme for Digital Transactions (2019) defines digital transactions as “a payment transaction in a seamless system effected without the need for cash at least in one of the two legs, if not in both. This includes transactions made through digital/electronic modes wherein both the originator and the beneficiary use digital/electronic medium to send or receive money.” AePS, BHIM UPI, Credit and Debit Cards, IMPS, Internet Banking, Mobile Banking, NACH, NEFT, NETC, PPI, and RTGS are some of the popularly used modes of digital transactions in India.
Digital transactions have increased significantly over the last few years
There has been a substantial increase in the volume of digital transactions over the last few years. Data from the Digidhan dashboard developed by the Ministry of Electronics & Information Technology  (MEITY) and a Rajya Sabha response from March 2021 shows that the total volume of digital transactions has increased from 1004 crores in 2016-17 to 5554.2 crores in 2020-21, registering a more than five-fold increase in five years. The volume is further expected to grow in 2021-22 if the trend holds. As of 15 June 2021, the total volume of transactions for about 2 and half months in 2021-22 has crossed 1160 crores. At this rate, it might just surpass the volume of transactions in 2020-21. The volume doubled between 2016-17 & 2017-18 which could be because of the demonetization, announced in late 2016.
Volume of transactions fell in April and May of both 2020 & 2021
It was during March 2020 that states started imposing lockdowns for curbing the first wave of COVID-19. The central government’s strict lockdown began on 25 March 2020 and continued till May 2020 following which relaxation of restrictions began. Similarly, in 2021, most state governments announced lockdowns in the months of April and May for controlling the more infectious second wave. The impact of these lockdown measures is clearly visible on the volume of digital transactions. In both 2020 & 2021, the volume of digital transactions reduced in the months of April & May compared to the month of March, as many businesses were shut because of the lockdown. The increased preference for digital transactions because of restricted mobility could not compensate for the loss of digital transactions arising out of the closure of businesses.
In 2020, it is observed that the transactions fell by nearly 37% in April as compared to March. The volume of transactions in May 2020 was still less than that of March 2020, but slightly more than April 2020 by about 7.5%.
This decreasing trend continued even in 2021. In 2021, while the month of March had registered a record 651 crore transactions, the volume of transactions dropped by 9.6% in April and further down by 14.5% in May. Besides the closure of businesses, reduced spending across classes could be another reason for this decrease in digital transactions.
Month on month comparison (M-O-M) of the volume of transactions reveals the change in volume in a particular month, in different years. For each of the months, the highest volume of transactions has been recorded in 2021 compared to previous years. While the volume of transactions has steadily increased in the months of March & May over the years, the volume of transactions in April 2020 reduced by 5% compared to April 2019. However, the volume of transactions in April 2021 was 94% more than in April 2020.
UPI transactions fell in April and May 2021, but not to the pre-lockdown levels
The Unified Payments Interface (UPI) is among the most popular payment systems being used nowadays. UPI is a mobile-based fast payment system under which bank details need not be shared with the remitter. Introduced in 2016, UPI enables money transfer with persons, merchants, utility bill payments, and QR code-based payments.
As per the information available on the National Payments Corporation of India (NPCI) website, UPI started gaining steam in 2017 and since then, a consistently increasing trend was observed both in the volume and value of UPI transactions. However, the trend was disrupted in March and April 2020 during the nationwide lockdown, when the volume and value of UPI transactions declined as opposed to the increasing trend. In June 2020, it reached the pre-lockdown levels and then continued to increase in the ensuing months. It should be noted that though there was a negative growth in March & April 2020,  the volume of UPI transactions during these months in 2020 was still higher than the volume during the same months in 2019.
The period from May 2020 to March 2021 witnessed the highest growth in UPI transactions. While the volume of UPI transactions more than doubled, the value increased 2.25 times in the ten-month period. The volume and value of UPI transactions touched an all-time high in March 2021, following a marginal drop in February 2021. However, in April and May 2021, there has been a reduction in the volume of UPI transactions by 3.3% and 3.8% respectively. The value went down by 2.2% in April and 0.6% in May 2021.
IMPS transactions have dropped to 2020 levels despite record transactions in March 2021
UPI and IMPS are the two fast payment systems existing in India. In 2010, India became the fourth country to introduce IMPS with an Rs. 2 lakh limit. Even non-bank entities can participate in these payments.
Like the trend observed in UPI transactions, the value and volume of IMPS transactions witnessed a continuous growth since 2014. However, the trend was disrupted in February 2020. The volume and value of transactions continued to drop in March 2020 and went further down in April 2020. Since May 2020, though the trend was reversed, the pre-lockdown levels were reached only in September 2020. Between May and December 2020, there has been a significant growth both in terms of volume and value of IMPS transactions compared to previous years. In January and February 2021, the volume of transactions dropped by 2.5% and 8% respectively to again touch an all-time high in March 2021. Since then, both volume and value of transactions dropped in April and reduced further in May 2021. The volume of IMPS transactions in May 2021 dropped to September 2020 levels.
Value of NEFT transactions in May 2021 lowest in 12 months
NEFT is used in transferring funds from one bank account to another without any ceiling on the amount that can be transferred in a single transaction. However, the clearance of these transactions takes place in half-hourly batches and hence the transfer is not real-time as in the case of UPI & IMPS. NEFT is mostly used for higher-value transactions.
As per the data released by RBI, the trend with respect to NEFT transactions is wavering and there is no significant growth, in contrast to the trend in UPI and IMPS transactions. Nonetheless, it is evident that the volume of transactions was the lowest in April 2020 in about 15 months.  From May 2020, the volume and value of transactions began increasing until December 2020. In 2021, the volume of transactions touched an all-time high of 34.8 crores which were worth Rs. 30.4 lakh crores. However, soon after, both the volume & value of transactions reduced significantly in April and May 2021. In May 2021, there were only 25.7 crore NEFT transactions worth Rs. 18.2 lakh crores. The value of NEFT transactions in May 2021 is the lowest in 12 months.
People’s spending patterns have changed due to pandemic
Until the second wave occurred, there was a steady growth in digital transactions though the economy was contracting which indicated a change in preference of payment systems. But the second wave of the pandemic has significantly affected the consumption and spending patterns of people. The reduced value and volume of transactions during the pandemic-induced lockdown in April & May 2021 support this.
While spending patterns may have changed, cash still remains the most preferred mode of payment and to receive money according to a recent pilot survey by the RBI in six cities with 6,192 respondents.
Featured Image: Value of Digital Transactions