Economy & BudgetImportant2025-03-19

Cabinet Approves Incentive Scheme for Low-Value UPI Transactions

In News

What Happened

On March 19, 2025, the Union Cabinet approved an incentive scheme with an outlay of ₹1,500 crore to promote low-value Person-to-Merchant (P2M) BHIM-UPI transactions. Under this initiative, acquiring banks will receive a 0.15 percent financial incentive per transaction for payments up to ₹2,000 made to small merchants. The scheme is designed to compensate banks for maintaining the digital payment infrastructure without passing costs onto retailers.

Why It Matters

This scheme is vital for deepening digital financial inclusion across India's informal economy and ensuring small merchants continue to adopt digital payments. By subsidizing the infrastructure costs for acquiring banks, the government guarantees that the Merchant Discount Rate (MDR) remains zero for small retailers, thereby sustaining the widespread adoption of UPI.

Background

History & Context

Effective January 1, 2020, the Indian government mandated a zero Merchant Discount Rate (MDR) for transactions via RuPay debit cards and UPI to accelerate the transition to a cashless economy. However, this zero-charge model meant payment service providers (PSPs) and acquiring banks lacked revenue to cover infrastructure and operational costs. To address this, the Ministry of Electronics and IT (MeitY) periodically rolls out financial incentive schemes to reimburse these entities. The National Payments Corporation of India (NPCI), an umbrella organization established in 2008 by the RBI and IBA, operates the underlying UPI architecture.

What Changed

▶
BEFORE: Banks faced the operational burden of processing millions of low-value P2M transactions without any revenue, as the zero-MDR rule prevented them from charging small merchants. NOW: Acquiring banks receive a direct government subsidy of 0.15 percent per transaction for payments up to ₹2,000, covering their operational costs.
▶
BEFORE: Previous budgetary outlays for UPI and RuPay incentives had expired or were nearing exhaustion, causing uncertainty for payment aggregators and banks regarding future infrastructure investments. NOW: A fresh ₹1,500 crore outlay provides a guaranteed financial runway, ensuring continued bank support for onboarding small and informal merchants.
▶
BEFORE: The cost structure of micro-transactions threatened to slow down the expansion of digital point-of-sale infrastructure in rural and semi-urban areas. NOW: The targeted incentive makes it financially viable for banks to aggressively expand merchant acquisition networks in Tier-3 to Tier-6 cities.

Prelims Angle

NCERT Connection

This scheme connects to Class 12 Macroeconomics Chapter 3 (Money and Banking), specifically the sections dealing with the banking system and the evolution of fiat money. The government's subsidy for the zero-MDR UPI ecosystem is a practical application of state intervention to modernize the payment and settlement system, thereby increasing the velocity of money and reducing the transaction friction in the economy.

Practice Questions

Q1

Correct Statement(s)

Which of the following statements is/are correct regarding the government's incentive scheme for low-value UPI transactions? 1. The scheme provides a 0.15 percent incentive per transaction to acquiring banks for Person-to-Merchant (P2M) payments up to ₹2,000. 2. The Merchant Discount Rate (MDR) for UPI transactions is determined by acquiring banks and is capped at 1% for small neighborhood retailers.

Up next