I can see the usability aspect, but using an insecure protocol like SMS for something like payment sounds like an absolutely awful idea.

RCS might work as it's a bit more secure (and more importantly: doesn't have a 2G/3G compatible version that criminals might trivially abuse); it even has an optional money sending API in its protocol.

People who are using upi over sms don't have a lot of money. Scamming them isn't worth the trouble.

The wallet doesn't allow you to keep more than ₹2000

There is UPI wallet (preload your wallet) that require no internet. But this still require a smartphone.

The SMS option is mainly to avoid requiring a smartphone. There is a huge population that do not have a smartphone.