Subsidies Renewed For Indian Banks On Low-Value RuPay Debit Card, UPI Payments

January 23, 2023
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The Indian government has announced that it will continue a long-standing incentive scheme that allows banks to claim subsidies for processing certain types of low-value digital payments.

The Indian government has announced that it will continue a long-standing incentive scheme that allows banks to claim subsidies for processing certain types of low-value digital payments.

Last week, India’s Ministry of Electronics and Information Technology (MEITY) published a statement explaining its latest framework for the promotion of low-value digital payments.

This includes those RuPay debit cards payments, whether online or at the point of sale (POS), and person-to-merchant (P2M) payments made via BHIM-UPI, India’s instant payments network.

As in the previous financial year, the government will subsidise 0.4 percent of the value of each RuPay debit card transaction, with a cap on subsidy paid per transaction of ₹100 ($1.20).

The only exceptions will be RuPay debit card payments for items such as insurance, mutual funds, education, railways, agriculture, fuel, jewellery and hospitals.

For these items, the subsidy will be 0.15 percent of the value of the transaction, with a cap on subsidy paid per transaction of ₹6 ($0.07).

For BHIM-UPI P2M payments, the government will subsidise 0.25 percent of the transaction value on payments under ₹2,000 ($25).

Once again, the exceptions are similar to the RuPay ones, albeit with the addition of debt collections, fuel, petroleum products, telecom, utilities, hospital bills and business/personal services.

For each of the above, the government will subsidise 0.15 percent of the transaction value on payments under ₹2,000 ($25).

The duration of the scheme will be one year, backdated to April 1, 2022, and its cost will be covered by the government budget for financial year (FY) 2022-23.

Reimbursement claims will be handled on a quarterly basis. For the first, second and third quarters of the scheme, 90 percent of the claim amount will be admitted, and in the fourth quarter only 80 percent will be admitted.

In the first three quarters, to claim the remaining 10 percent, banks must prove that they have increased their year-over-year growth in RuPay debit card transactions by 10 percent and BHIM-UPI P2M transactions by 70 percent, counted from the last quarter of the scheme.

For the fourth quarter, to claim back the remaining 20 percent, banks must show that they have enabled UPI Lite and UPI 123PAY on the existing BHIM-UPI platform, and have processed at least 2 percent of BHIM-UPI P2M transactions on UPI Lite during the last quarter of the scheme.

Following consultations with the National Payments Corporation of India (NPCI), MEITY said it will issue operational guidelines for the implementation of the scheme at a later date.

Finally, MEITY said the subsidy payments are to be shared by the acquiring banks with other payment system participants and the payment system operator, in a manner and proportion to be decided by MEITY and the NPCI.

MEITY’s rationale

MEITY believes that the subsidy programme is necessary and worthwhile to complement the government’s wider goal of increasing digital payments and incentivising use of its own systems, RuPay and UPI.

Over the past four years, India has already grown its total number of digital transactions fourfold, from 21bn in FY2017-18 to 88bn in FY2021/22. MEITY believes that the subsidy programme will help continue this momentum.

However, with more transactions comes a much larger subsidy bill. Last year (2021-22), the estimated outlay of the subsidy scheme was ₹13bn ($159m), whereas this year (2022-23) the outlay is capped at ₹26bn ($319m).

Balakrishnan Mahadevan, former chief operating officer (COO) at NPCI, told VIXIO that the increasing cost of the scheme, among other reasons, should give the government pause for thought.

“While it provides some income for the banks and their service providers, I am not sure that subsidy is the way to go,” he said.

“Already, the ask for the next financial year is substantially more than what was provided for the current year.

“Should we be giving subsidies for this, or should we allow market players and regulators to determine this instead?”

According to Mahadevan, the subsidy scheme in itself represents a “tacit admission” that banks need revenue to compensate for a regime where the merchant discount rate (MDR) is effectively reduced to zero.

“Nowhere in the world is there an intervention like this,” he said. “Generally, the governments and regulators have put a cap on interchange or MDR, and subsidies for digital payments are not observed.”

Five years of subsidy

MEITY’s announcement of the renewed subsidies scheme marks five years, with slight variations along the way, since it was first introduced.

In December 2017, the Reserve Bank of India (RBI) outlined new MDRs for debit card transactions based on merchant category and acceptance device.

Small merchants with an annual turnover of up to ₹2m ($24,500) were to pay no more than 0.4 percent of the transaction value when using POS, and no more than 0.3 percent when using QR code. In both cases, the MDR would be capped at ₹200 ($2.46) per transaction.

Meanwhile, larger merchants were to pay no more than 0.9 percent of the transaction value when using POS, and no more than 0.8 percent when using QR code. In both cases, the MDR would be capped at ₹1,000 ($12) per transaction.

Later in December 2017, when MEITY initiated its subsidy scheme, it effectively cancelled out the MDR for smaller merchants on all transactions under ₹2,000 ($25).

“The industry has been asking for some MDR to cover the expenses but not zero MDR fees,” said Mahadevan.

“Unless the government has done some research and has data to show that without the MDR set at zero, the growth in digital transactions would not have happened, then this is an unusual setup and may be warranted.

“One could also argue that the growth we have seen in UPI transactions is because UPI has no MDR. But for RuPay debit cards, transactions have not grown significantly, so perhaps UPI is cannibalising them?”

Looking at the statistics, Mahadevan’s thesis is persuasive. In 2016-17, the total value of RuPay debit card transactions was ₹349bn ($4.3bn), and the total value of UPI transactions was ₹69bn ($850m).

In 2021-22, however, though the total value of RuPay transactions increased sevenfold to ₹2.4trn ($30bn), it has been dwarfed by the explosive increase in UPI transactions to ₹84.1trn ($1trn), with about 40 to 50 percent of these being P2M payments.

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