 "Amitabh Chaudhry, MD and CEO, Axis Bank")
Despite providing the guard rails for the country’s retail digital payments platform, Unified Payments Interface (UPI), banks are not earning anything from settling these transactions, which is one among the many reasons why bank’s costs are rising faster than their incomes, said MD & CEO of Axis Bank Amitabh Chaudhry.
“We don’t get paid a penny for providing all the pipes for UPI. There used to be some subsidy, which has been reduced to one third of what it was,” he said at the FIBAC conference on Monday while responding to a question on why the income of Indian banks is not keeping pace with their rising costs.
“The (bank’s) income has been lower because unlike a lot of the markets around the world, I think, the regulator has played a pretty active role in ensuring that the charges to the broader community or the customers at large is kept at a minimum,” Chaudhry said.
He added that the growth on the income side has been subdued because a lot of the charges keep getting taken away over a period of time in the interest of the consumer to have a widespread usage of some of these infrastructures, which is getting created.
According to a BCG report, the Indian banking industry’s opex ratios have risen over the past 15 years – a trend that is opposite to the rest of the world. Cost to income ratios continue to increase, with operating income growth trailing operating expenses growth.
Despite a decade of digitisation, real productivity gains have been limited, with only about 1 per cent annual improvement over the past 15 years (adjusted for inflation and capacity growth), the report said.
Of late, the issue of UPI being free for consumers has been under the scanner. Reserve Bank of India (RBI) Governor Sanjay Malhotra recently reminded that someone is footing the bill, and for now, it is the government. While the government wants transaction volumes to expand tenfold, but industry participants, including fintechs and banks, say the UPI ecosystem may be nearing a tipping point where technology and operational costs are difficult to absorb. As a solution, the stakeholders have been pressing for the introduction of a merchant discount rate (MDR) on UPI P2M transactions.
According to the National Payments Corporation of India (NPCI), the umbrella organisation that facilitates services such as UPI payment, Bharat BillPay, RuPay, FASTag etc, an MDR of up to 0.3 per cent is applicable for UPI P2M (person-to-merchant) transactions.
However, to promote digital transactions, the MDR was brought down to zero in January 2020 for RuPay debit card and BHIM-UPI transactions through amendments to Section 10A of the Payments and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961.
To help the payment ecosystem’s participants deliver the services effectively, the government has implemented the “Incentive Scheme for Promotion of RuPay Debit Cards and Low-Value BHIM-UPI Transactions (P2M)”. Under this scheme, the government pays the incentive to the acquiring bank (merchant’s bank), which then shares it with other stakeholders: the issuer bank (customer’s bank), the payment service provider bank (that facilitates UPI onboarding/API integration), and third-party app providers.
However, that support is shrinking. In FY26, subsidy for UPI P2M and RuPay debit card transactions has been slashed to ₹437 crore — down 78 per cent from the final outlay of ₹2,000 crore in FY25, and much lower than the ₹3,631 crore approved in FY24.
This marks the second consecutive year when incentives for promoting digital payments were reduced. The final allocations for the incentive scheme, launched in April 2022 with an initial outlay of ₹2,600 crore, is often higher than the budgeted amount. For instance, in FY25, the initial allocation was ₹1,441 crore, which was later revised upward to ₹2,000 crore. The payment industry’s estimates peg the annual requirement closer to ₹10,000 crore to maintain and expand UPI services.
