It was expected to revolutionize the way consumers use credit in the country when the National Payments Corporation of India (NPCI) announced a credit line on the Unified Payments Interface (UPI) last year.

Eight months later, the product has been stuck in negotiations regarding the interchange and merchant discount rate (MDR), the commission the merchants pay to banks and other payment processors in the chain.

NPCI is planning to announce the MDR structure in June, according to sources. However,  because of a lack of a strong business case, a lack of interest among several participants – whether it is the banks or the third-party UPI apps such as PhonePe and Google Pay – could mean that this will take a few years before becoming successful.

“There needs to be a primary beneficiary of the product who will lead the adoption and take the lead in marketing. Here, there is none as per the current proposals and hence it has been stuck,” says the digital head of a large private sector bank.

A credit line on UPI is a pre-approved loan linked to the customer’s bank account and is connected to their UPI. Regardless of the UPI app that the customer is using, the credit assessment is done by the customer’s bank. The customer will get a pop-up on the UPI app as and when the credit facility is done and they can enable it and can start drawing money from the credit line.

NPCI and banks are developing two versions of the product. One version will offer an interest-free period for the credit, similar to credit cards, while the other will require interest payments from day one, akin to overdraft loans.

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Because providing an interest-free period incurs higher costs for banks, NPCI plans to implement an MDR of 1.1 percent for this version. The second version, which charges interest from the start, will have an interchange fee of less than 0.5 percent.

In a merchant transaction involving the sale of a product or service, merchants make a profit, which is why they are charged the MDR. This fee is shared among all the payment companies involved in the transaction, while the interchange fee goes entirely to the issuing bank, in this case, the credit line issuer.

To encourage the adoption of digital payments among merchants, the central government mandated in 2020 that UPI transactions below Rs 2,000 should be MDR-free. In contrast, all card payments, except for NPCI’s RuPay debit cards, carry different MDR rates.

NPCI is in discussions with all the partners on the acceptable interchange/MDR rates for the participants, who have not been able to agree on the features, pricing, or fees/charges.

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