Will new MDRs be counterproductive to RBI’s goal of a less-cash economy?

Published On: 14, Dec 2017 | Source: financialexpress.com

After RBI rationalised the Merchant Discount Rates last week, with a view to achieving the twin objectives of promoting less-cash economy and ensure all stakeholders do a profitable business, experts point out that the move may actually be counterproductive. According to the latest revision, MDR charges for small merchants with an annual turnover of up to Rs 20 lakh has been fixed at 0.40% with a cap of Rs 200 per transaction by debit cards through Point of Sale (PoS) machines or online transactions. The new rates will come into effect from January 1. Further, the Reserve Bank has revised the MDR for debit card transactions at large format retail stores from 0.5 percent per transaction to 0.9 percent (not exceeding Rs 1,000).

While the RBI said the rates have been ‘rationalised’ to increase the acceptance of debit cards by a wider set of merchants, the increase and the high cap defeat the purpose as it almost doubles the cost borne by merchants, the Retailers Association of India (RAI) told PTI. 

Industry insiders and traders associations say while this will benefit retailers with average billing size of more than ₹2,000 per transaction, the smaller players will be at loss as they will have to bear the entire cost of operations. Notably, the rate for transactions above Rs 2,000, has been reduced from 1% to 0.9%.

Deputy Governor, BP Kanungo of RBI told PTI, “To push digitisation, especially in small towns, we had to ensure that small merchants are encouraged to accept card payments, and at the same time, ensure that banks which provide this service should not be making losses.”

Following demonetisation, the RBI had in December last year capped the MDR charges at 0.25% for transactions up to Rs 1,000. For transactions above Rs 1,000 and up to Rs 2,000, it was capped at 0.5% of the transaction value. Before that, the MDR was capped 0.75% for transaction up to Rs 2,000 and not exceeding 1% for payments above Rs 2,000. Retail Association of India (RAI), says that retailers might not be keen on using the PoS device and cash transactions may rise in the coming months if the rates are not revised.

Value of digital transactions across the country has increased by 80% with the total amount expected to reach Rupees 1,800 crore in 2017-2018, official data suggests. The value of digital payments till October this year was at Rupees 1,000 crore, nearly equal to the value for entire 2016-2017. According to the Ministry of Information Technology, digital payments registered Rs 136-138 crore on an average from June-August keeping on the trend from the beginning of the year. Whether RBI’s move reduces the digital transactions in the country remains to be seen.