Govt to refund MDR losses to banks on digital payments for FY23

The Union Cabinet chaired by Prime Minister Narendra Modi on Wednesday approved an incentive scheme worth Rs 1,300 crore for 2022-23 to promote RuPay debit cards and low-value Unified Payments Interface (UPI) transactions up to Rs 2,000 by reimbursing the merchant discount rate (MDR) to banks, which was brought down to zero in December 2019.  

The scheme is expected to facilitate acquiring banks in building a robust digital payments ecosystem and promoting RuPay debit cards and BHIM-UPI digital transactions across all sectors and segments of the population, further deepening digital payments in the country, said the Cabinet Secretariat in a media briefing.

“This is like investment for digital payments, so that more and more people carry out digital transactions. In November, a record 4.23 billion digital transactions valued at Rs 7.56 trillion were carried out,” said Minister for Communications, Electronics and Information Technology Ashwini Vaishnaw, while addressing the media.  

“This has been done to compensate banks that lost money because of zero MDR on RuPay debit cards and UPI. The objective is to largely keep these transactions free. Mostly public sector banks issue RuPay debit cards. In that sense, the impact on Visa and Mastercard will be minimal because they have a sizeable market share among private banks and in the credit card segment,” said Suresh Ganapathy, associate director, Macquarie Capital.

Payment companies like Visa and Mastercard have been seeking a level playing field with RuPay, claiming the government is favouring the latter. Reuters reported last month that Visa has complained to the US that India’s “informal and formal” promotion of domestic payments rival RuPay hurts the US giant in a key market.                

Another industry expert said Rs 1,300 crore may not be sufficient to fully compensate banks for the MDR loss. “However, it will give them some breathing space,” he added.

The press statement said the scheme will also make digital modes of payments to the unbanked and marginalised more accessible.

“India today is one of the most efficient payments markets in the world.  These developments have been the outcome of the initiatives of the Government of India and innovation by various players in the digital payments ecosystem. The scheme will further spur research and development and innovation in the financial technology space,” it added.

The scheme has been formulated in compliance with the Budget announcements (2021-22, or FY22) by the government to give further boost to digital transactions in the country.

“There has been a manifold increase in digital payments in the recent past. To give further boost to digital transactions, I earmark Rs 1,500 crore for a proposed scheme that will provide financial incentive to promote digital modes of payment,” Finance Minister Nirmala Sitharaman had said in her FY22 Budget speech.

“The industry has had its share of problems since the announcement of zero MDR, but it will greatly benefit from this initiative of reimbursement of transaction charges levied on digital payments, which will help it to scale up the payments infrastructure in the country, thereby enhancing financial inclusion. The Payments Council of India (PCI) whole-heartedly welcomes the Cabinet decision on the incentive scheme for RuPay debit cards and UPI,” said Vishwas Patel, chairman, PCI, and director, Infibeam Avenues.