Subsidy on small-value UPI payments cut, banks look for ways to offset cost
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A cut in the government incentive on small-value Unified Payments Interface-based transactions is pushing banks towards levying charges on certain UPI transactions, according to two bankers in the know.The finance ministry reduced the incentive for processing small-value UPI payments at small merchant outlets to 0.15% per transaction from 0.25% last year. The incentive is paid with a lag of 12-18 months, hence the calculation will be based on digital transactions processed in the financial year 2024-2025.For banks, this reduction is a double whammy of sorts, as it comes on top of the withdrawal of all forms of incentives offered against RuPay debit cards and UPI payments made at large merchant outlets.In a letter dated March 24 to banks, the finance ministry said it made the decision in consultation with the National Payments Corporation of India, which manages the UPI platform. ET has seen a copy of the letter.The finance ministry and NPCI did not respond to emailed questions until press time Thursday.As per regulatory definitions, a small merchant is one with a turnover of less than Rs 20 lakh in the previous fiscal year.The government had introduced the incentive to compensate banks for providing UPI services for free. The decision to cut the subsidy reflects a drastic reduction in the budgetary allocation for digital payments incentive to Rs 1,500 crore in fiscal 2025 from Rs 3,500 crore paid out last year. Bankers said with no government support, they may have to find ways to offset the cost of providing the service.'After the government withdrew the incentive pay-out on a large part of the payments market, now 10 basis points have been reduced on small-value payments as well. Banks will be forced to pass on some of the charges to their payment aggregating partners,' said a senior banker with a private sector bank. The payment aggregators could be passing on these charges to some of the large merchants. ICICI Bank has started passing on some of the charges to its payment partners, news platform the Head and Tale reported on Wednesday.In the year prior, the government ran a more elaborate incentive scheme for the digital payments industry, offering 0.25% for payments up to Rs 2,000 across all forms of merchants for UPI and RuPay debit card transactions. Transactions made at government websites for financial service payments like insurance and mutual funds attracted a lower incentive of 0.15% incentive. All those incentives stand withdrawn this year.The ministry's letter to banks said the Department of Financial Services, in consultation with the NPCI and the financial advisor to the government, might revise the charges from time to time.Last week, while speaking at an event in Mumbai, Reserve Bank of India governor Sanjay Malhotra spoke about the need to make UPI payments sustainable and mentioned that either the government or the users would have to bear the price of running the payment rails.While the digital payments industry has also been pushing the government to bring back the merchant discount rate on UPI payments, the government has said that UPI would continue to operate for free.According to RBI data, the UPI platform had recorded 18.4 billion transactions in June, while RuPay debit card transactions at point-of-sales terminals and ecommerce platforms had totalled 78 million.
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