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Banks Holding on To Government-Granted Subsidy Share, Affirm Payments Firms

Payments companies and banks are at loggerheads over the sharing of government-granted subsidies for building payment infrastructure, said three people with knowledge of the matter.

The companies have written to the National Payments Corp. of India (NPCI), complaining that ₹700 crore of the ₹1,500 crore granted in the budget is being retained by banks, they said. This has deprived companies connecting up the last mile of state-promised revenues, according to them. The government granted the subsidies in exchange for waiving Merchant Discount Rate (MDR) charges.

"The government has released ₹700 crore worth of subsidies to banks but they are not sharing it with any payment aggregators," said the CEO of a payments company on condition of anonymity.

Compensation for MDR Waiver


"We have taken up the matter with NPCI, which is the nodal agency but the feedback that we got is that we should take the matter up with respective banks, but they are not responding."

Last year, finance minister Nirmala Sitharaman had announced a Rs 1,500 crore fund to hasten the expansion of India's digital payments industry, a move that was seen as compensating for the waiver of MDR on the use of the Unified Payments Interface (UPI) and RuPay cards in her previous budget.

Payment aggregators are entitled to receive a 15-basis point subvention on small-value digital transactions. A basis point is 0.01 percentage point.

"We have asked all banks for whom we process transactions on the RuPay debit cards--they are not sharing any subsidy amount with us," said another CEO. "Payment aggregators put in so much effort to acquire transactions on the RuPay platform when most banks were either surrendering these cards or going slow on expansion."

Banks didn't respond to queries on the matter.

Currently, the cost of digital payment services such as switching fees or interchange fees is borne by one or more of the payment system participants or is passed on to merchants through the MDR or ultimately levied on the customer as additional charges.

The Reserve Bank of India (RBI) said it will carry out a comprehensive review of all aspects related to charges involved in various channels of digital payments in the recently released Payments Vision 2025 document.

"We believe this review could result in relatively higher credit card and wallet MDRs and the introduction of MDR on UPI to at least cover the cost," said Anand Dama, senior research analyst, Emkay Global. While the adoption of electronic payments has surged, concerns abound over viability. Total digital payments rose 216% and 10% in terms of volume and value, respectively, in March from the year earlier, according to RBI data.

On the other hand, usage of paper instruments such as cheques declined significantly during the period, with their share in total retail payments registering a decline from 3.83% to 0.88% in terms of volume and from 19.62% to 11.47% in terms of value.

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