Demonetisation: Banks may lose Rs 600 cr if Narendra Modi government waives off MDR on debit cards

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New Delhi | Updated: December 15, 2016 7:17:09 AM

Banks stand to lose just about R50 crore a month, or R600 crore a year, if the government was to waive the merchant discount rate (MDR) on debit card transactions executed through point-of-sale (PoS) machines.

Data from the RBI showed debit card transactions during the year ended March 2016 stood at approximately R1.6 lakh crore. (Reuters)Data from the RBI showed debit card transactions during the year ended March 2016 stood at approximately R1.6 lakh crore. (Reuters)

Banks stand to lose just about R50 crore a month, or R600 crore a year, if the government was to waive the merchant discount rate (MDR) on debit card transactions executed through point-of-sale (PoS) machines. This is assuming the government does not make good the losses incurred by the banking system. The MDR is the charge a merchant pays to a bank for using card transaction services.

Data from the Reserve Bank of India (RBI) showed debit card transactions during the year ended March 2016 stood at approximately R1.6 lakh crore. Senior banking executives that FE spoke to indicated that typically, smaller transactions — below R2,000 — account for half of all transactions executed through debit cards at PoS terminals. By this measure, the annual amount for such transactions would come in at around R80,000 crore, and the monthly quantum at close to R6,660 crore.

RBI has fixed a cap of 0.75% on MDR for transactions less than R2,000. Given this, the banks would normally make nearly R596 crore a year or R49.66 crore a month through the use debit cards via PoS machines. If transactions for just October 2016 were to be considered — since it is the peak of the festive season — banks would have made some R80 crore.

Rajnish Kumar, managing director, State Bank of India, told FE the lender had seen a near-threefold increase in the use of debit card at PoS machines since the government on November 8 announced that banknotes of R500 and R1,000 denominations would cease to be legal tender. “We have seen a significant rise in debit card transactions,” Kumar added.

Last Thursday, finance minister Arun Jaitley announced a host of measures to push digital transactions in the aftermath of the demonetisation of R500 and R1,000 currency notes. These included the abolition of transaction fees and MDR payable on digital payments to central government departments and central public sector undertakings. It has been reported since that the government is considering a proposal to ask banks to scrap MDR on debit card transactions of under R2,000 at PoS machines up to March 2017.

Banks and the RBI are believed to be opposed to the proposal, as it may hurt their earnings while doing little to push a change in payment behaviour. “It is a very small fee. I don’t think traders refuse payments by card because of MDR. It’s all about taxation (merchants’ wish to avoid paying taxes) and customer behaviour because people are comfortable dealing with cash.

MDR is being made into a big issue,” a senior executive at a large public sector bank told FE.

Earlier, on November 22, economic affairs secretary Shaktikanta Das had said that the government had asked all banks to waive MDR or transaction fees on debit card payments up to December 31, and that all state-owned banks and some private sector lenders had agreed to do so.

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