For millions of Indian families, the most important message on the mobile phone each month is not a social media notification. It is the message saying that money has arrived from abroad.
Today, anxiety hangs heavily over many such families. The continuing conflict and instability in West Asia have once again reminded us how deeply India’s economy is tied to migrant workers in the Gulf. For the millions of recipient families, such conflicts are not distant geopolitical issues. They are questions about school fees, medicines, rent and survival. Behind India’s remittance numbers lie stories of sacrifice.
A son working at a construction site in Dubai sends money home to ageing parents. A nurse in Riyadh supports her daughter’s education in Kochi. A techie in California sends part of his earnings to keep the household running. Entire local economies in states like Kerala and Punjab depend heavily on overseas earnings.
That is why it’s a matter of concern that a portion of this hard-earned money never reaches the family. It disappears in transfer commissions, foreign exchange markups and intermediary charges. Digital payments inside India happen instantly at almost zero cost - why not cross-border? Surely this is an issue that deserves far greater attention.
India’s Massive Remittance Economy
India’s overseas population is estimated at more than 30 million people by the Ministry of External Affairs. India today receives more overseas remittances than any other country in the world. The World Bank Migration and Development Brief 40 estimates remittance inflows into India at about USD 129 billion in 2024 (over Rs 10 lakh crore). The top ten source countries are the USA, UAE, UK, Saudi Arabia, Singapore, Canada, Australia, Kuwait, Oman, and Qatar.
Another World Bank database puts the global average cost of sending USD 200 internationally at about 6.5 per cent. India fares slightly better, but average costs still hover around 5 per cent. If the remittance is entirely through formal banking channels, costs tend to be much higher.
These costs arise from several layers: transfer commissions charged by banks or money transfer operators, foreign exchange conversion markups, correspondent bank charges, settlement and compliance costs etc.
At the macro level, the numbers add up to a lot. If India receives USD 135 billion in remittances (as is currently estimated), at an average transaction cost of 5 per cent, it means about USD 7 billion of this goes to intermediaries. That is roughly Rs 65,000 crore — no mean sum!
In addition, remittances also flow through the traditional hawala route that many workers still rely on. Hawala channels are said to be faster and cheaper. The system is entirely based on trust. Minimal paperwork is required, and transactions are seamless compared to formal banking channels.
Commissions are believed to range between 2 and 5 per cent, and there is door-to-door delivery. Of course, hawala carries obvious risks. It is illegal and is used for criminal activity and money laundering. Yet many ordinary workers prefer it for sheer ease of transfers.
The challenge is really to make formal systems simpler and cheaper so that the incentive for such informal networks is reduced. Enabling technologies exist today.
Can UPI Solve The Problem?
India’s Unified Payments Interface (UPI) has transformed domestic payments. Even a roadside tea seller can receive instant payments through a mobile phone at almost no cost. So why not UPI for overseas remittances too?
Actually, it’s work in progress. India has already linked UPI with systems in eight countries - Singapore, UAE, Qatar, Nepal, Sri Lanka, Bhutan, Mauritius and France. These linkages have varying degrees of functionality. Some remain limited to QR codes, selected banks or pilot corridors.
Still, these arrangements are important because they reduce friction in transfers. For example, a worker in Singapore can now transfer money directly into an Indian bank account through linked digital payment systems. Compared to traditional remittance channels, this is a major improvement: transactions are much faster, user experience is simplified and funds move directly into bank accounts.
However, unlike the domestic parent UPI that is almost cost-free for the recipient, the international incarnation of UPI does not quite eliminate remittance costs. When UPI is used internationally, banks and payment providers still earn through foreign exchange conversion spreads.
In practice, FX markups may still range between 1 and 3 per cent depending on the corridor and provider. There may also be processing and settlement charges built into the transaction. So while the transfer feels seamless to the user, hidden costs do not fully disappear. It is, nevertheless, a lower-cost option compared to normal banking channels.
Multilateral Initiatives: Project Nexus
To smooth international remittances, the Bank for International Settlements (BIS) has promoted Project Nexus, which aims to connect fast payment systems of multiple countries into one interoperable network. RBI is on board with this initiative. The aim is to have a one-stop shop; to allow a person in one country to transfer money instantly into any other country’s payment system just as easily as a domestic transfer. It means that instead of India separately negotiating payment links with every country, one larger interconnected framework could emerge.
The advantages are obvious. However, from the narrow point of view of a major recipient country like India, there may be downsides.
First, the final cost of transactions will be known only after the system is launched. Nexus works through the banking system. Transactions continue to move through regulated financial institutions, and banks will continue to earn from foreign exchange spreads and liquidity management.
And BIS is not a charity platform. Settlement infrastructure, liquidity provision and compliance mechanisms all carry costs. Even if direct transfer fees fall sharply, the overall effective cost may not be significantly lower than at present once these spreads are included.
Second, Nexus depends on international cooperation. If regulatory or geopolitical tensions arise between countries, payment connectivity can become vulnerable. For example, Swift was once considered to be a neutral and widely acceptable system for cross-border banking transactions. It’s still the most acceptable, but no longer neutral. Recall that access to Swift was suddenly and arbitrarily cut off for Russia due to the displeasure of the Western bloc over the Ukraine conflict.
What about Blockchain Technology?
Some believe that the real solution may lie partly outside the traditional banking system altogether, using blockchain technology. Essentially, blockchain is simply a distributed digital ledger, a shared record of transactions that is maintained simultaneously across many computers rather than by one central institution. Because everyone on the network can see the same verified record, transactions take place transparently and directly between users without needing multiple banks, correspondent banks and clearing agencies sitting in the middle. This has potentially huge implications for remittance costs.
Recent advances in blockchain technology have made it simpler to realise this potential. It is now possible to have near-instant transactions, negligible network costs, the ability to handle very large transaction volumes, and continuous 24-hour operation. Digital dollar-linked assets can be transferred instantly at virtually no cost.
The catch here is that while sending digital assets across a blockchain network may be extremely cheap, families ultimately need rupees in their bank accounts or cash in hand. Converting blockchain-based cryptocurrency into rupees still requires exchanges, payment providers or intermediaries. These “off-ramp” charges may be in the range of 2–5 per cent, reducing some of the cost advantage.
Regulatory uncertainty and compliance requirements are also significant obstacles at present. Governments across the world remain cautious about crypto because of concerns relating to money laundering, tax evasion, cybercrime and financial stability. In India, too, the government continues to frown upon anything to do with crypto-assets.
For educated and technologically confident users, the risks may be manageable. But for migrant workers and family members receiving money in villages back home, such systems are not yet practical to operate.
Blockchain technology holds out enormous promise. To be useful for our purpose, ways will have to be found to reconcile its independent and decentralised nature with different countries’ regulatory and compliance requirements. Blockchain-based Central Bank Digital Currencies (CBDC) are being tried out by several countries, including India. If it becomes possible to work out a system to seamlessly exchange these CBDCs across countries, they may eventually be the way to go.
So What Is the Best Way Forward?
For the foreseeable future, the most practical near-term solution appears to be to push cross-country UPI integration and make dedicated efforts to cut intermediary costs further. We need to consciously expand bilateral cooperation with key high-volume countries to achieve this. Of course, we should continue to be part of multilateral initiatives like Nexus and hope that others come on board and that costs are found to be competitive. In the long run, stable bilateral arrangements with key countries may end up being more reliable and avoid potential geopolitical risk.
Securing a reduction of transaction costs on overseas remittances deserves to happen not just as a by-product of emerging technologies, but as a stand-alone policy imperative that needs to be actively pursued. Considering the large amounts involved and the crores of Indians directly affected, every percentage point matters! We have to reach the stage where overseas workers do not feel the need to make legitimate remittances by hawala.
With current technology, all this is possible. Focused policy attention is all that’s needed to get it done. As the German playwright Goethe famously put it, "Knowing is not enough; we must apply. Willing is not enough; we must do."
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the publication. |
