Government may compensate banks for loss of MDR, says IT secretary

The Centre is considering ways to incentivise banks and payment intermediaries to promote digital transactions, a top government official said. One of the proposals is to compensate banks for the loss of Merchant Discount Rate (MDR), which was brought down to zero in December 2019.
 

“MDR is one of the areas in which banks require support. If we keep MDR at zero, they will face losses,” said Ajay Sawhney, secretary, Ministry of Electronics and Information Technology (Meity), in an interview. “We had compensated them (banks) earlier and are looking at various options now.”
 

MDR is a fee which merchants are charged in a digital transaction and which goes to the banks and payment intermediaries involved in the transaction. The fee is an earning for these parties and incentivises them to improve infrastructure and acquire more customers. When in force, it was around 1-2 per cent of the digital transaction value.
 

The move is part of the Budget proposal, where the government has earmarked Rs 1,500 crore for the promotion of digital payments this fiscal. “The provision of Rs 1,500 crore lends a lot of impetus to the entire domain of digital payments,” said Sawhney, adding that the money will be split three-ways.
 

The primary goal is to incentivise banks to strengthen the digital payment infrastructure, which may include adding data center capacity, customer outreach and pushing for the adoption of QR-codes and POS terminals. The second is to get more merchants on-board digital payments. Currently, only 10 million or an estimated 60 million merchants use at least one form of digital payments, according to Meity estimates.
 

Thirdly, “we will also try to spread awareness, strengthen cybersecurity and take initiatives to create awareness about phishing attacks that grow with the growth in volume,” Sawhney said.
 

The ecosystem of payment apps on the Unified Payments Network has seen phenomenal adoption in the recent past. From 1.3 billion transactions (volume) on UPI in January 2020, the figure nearly doubled to 2.3 billion in January 2021. Banks on UPI also grew from 144 to 207 in this period.
 

Other proposals
 

A key focus this year is to promote local manufacturing of electronics, including mobile phones, said Sawhney. In the Budget, the government increased import duty on chargers, circuit boards and LED lights, in a bid to make locally manufactured items attractive.
 

In September last year, the Centre approved a performance-linked incentive scheme (PLI) for 16 sectors including electronics. Under the PLI scheme, the government will give 4-6 per cent cost incentive to eligible electronic companies, including some foreign companies.
 

Sawhney said the ministry is hammering out finer points to expand it to electronics beyond mobile phones, and the cabinet will soon approve it.
 

The other key focus is National Language Translation Mission, which was also announced in the Budget. Under the scheme, the government will pool sources of text and speech data for the purpose of research and creation of Natural Language Programming, or NLP-based solutions.
 

“The strategy includes core research, where we use some of our best research groups in this area, the IITs, IIITs, C-DAC (Centre for Development of Advanced Computing). The second part is creating large data sets, again with various stakeholders in the ecosystem, followed by a platform to discover and promote the best indigenous solutions,” Sawhney said.