Govt Approves ₹1,500 Crore Incentive for Small Value BHIM-UPI Transactions in FY25

The Union Cabinet has approved a ₹1,500 crore incentive scheme to promote low-value BHIM-UPI peer-to-peer merchant (P2M) transactions for 2024-25. This initiative aims to encourage digital payments and achieve a transaction volume of 200 billion in FY25. However, industry players have raised concerns about the sufficiency of the allocation and the long-term sustainability of the digital payments ecosystem.

Incentives for Small Merchants and Policy Details

For the first time, the Centre has defined small and large merchants concerning BHIM-UPI incentives. The government has set an incentive rate of 0.15% for transaction values up to ₹2,000 made to small merchants, while large merchants in the same bracket will receive no incentive. No incentives will be provided for transactions exceeding ₹2,000.

“The incentive scheme on promoting low value UPI transactions, which has been approved by the Cabinet today (Wednesday) will encourage digital payments and further ‘Ease of Living’,” Prime Minister Narendra Modi said in a post on social media X.

Industry Concerns Over Funding and MDR Policy

Industry players are not satisfied with the allocation, stating that ₹1,500 crore is inadequate to sustain growth. Currently, banks and digital payment firms bear the cost of processing UPI transactions due to the zero merchant discount rate (MDR).

“With a zero MDR of UPI and the government allocating only ₹1,500 crore for processing transactions of ₹246.82 trillion in 2024 to the ecosystem is just not going to be enough. It will choke the entire ecosystem for funds for scaling and growth,” said Vishwas Patel, joint managing director, Infibeam Avenues, and chairman, Payments Council of India (PCI).

According to industry estimates, ₹4,000-5,000 crore in incentives is required to cover processing costs. Patel suggested introducing a controlled MDR of 25 basis points on UPI P2M transactions for merchants with over ₹40 lakh turnover while continuing zero MDR for smaller merchants.

“We welcome the Cabinet decision to incentivise low-value transactions of up to ₹2,000 at the rate of 0.15 per cent for small merchants. We are hopeful that in the future a market-driven sustainable pricing framework (MDR regime) for low-value (P2M) transactions will evolve to incentivise all players,” said Jatinder Handoo, chief executive officer, Digital Lenders Association of India (DLAI).

The scheme outlines that 80% of the admitted claims by acquiring banks will be disbursed unconditionally, while the remaining 20% will be dependent on conditions such as banks maintaining a technical decline rate below 0.75% and system uptime above 99.5%.

Conclusion

The government’s initiative aims to strengthen digital payments, but industry stakeholders argue that the allocated funds fall short of supporting growth. The debate over introducing an MDR regime continues as industry players push for a long-term sustainable pricing framework.

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