The Indian government has introduced a new initiative to boost digital payments among small merchants via the BHIM-UPI platform. Named the ‘Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions (P2M),’ the program will run from April 1, 2024, to March 31, 2025, with an allocated budget of Rs 1,500 crore.
The primary goal of this scheme is to promote digital transactions for payments up to Rs 2,000, reducing dependency on cash. By incentivizing small businesses, the government aims to make digital payments more accessible and cost-effective.
Banks processing these transactions will also receive incentives. Each quarter, banks will receive 80% of their claimed incentive upfront, while the remaining 20% will be linked to service quality metrics. To qualify for the full incentive, a bank must:
- Maintain technical failure rates below 0.75%
- Ensure 99.5% system uptime
This measure encourages banks to enhance their digital payment infrastructure, ensuring smoother transactions for customers and merchants.
For customers, the scheme ensures safer, faster, and fee-free digital payments. Small merchants, who may have been reluctant to adopt digital payments due to additional costs, will now find it more viable. The initiative aligns with the government’s push for a cashless economy, financial transparency, and formalization of transactions.
By linking incentives to banks’ performance, the government aims to improve the reliability of digital payment services. Additionally, efforts will be made to expand UPI adoption in smaller towns and rural areas, with a focus on feature phone-based payments and offline UPI solutions.
Industry Concerns Over Insufficient Budget
However, industry experts have raised concerns about the Rs 1,500 crore budget allocated for the scheme. Many believe the amount is insufficient to sustain and scale the digital payments ecosystem.
“With Zero MDR on UPI and the government allocating just Rs 1,500 crore to support Rs 246.82 lakh crore worth of transactions, the system will struggle for funds. We expected at least Rs 5,000 crore, slightly more than last year’s Rs 3,500 crore, but this amount is a major setback,” said Vishwas Patel, Joint MD of Infibeam Avenues and Chairman of the Payments Council of India.
Patel also pointed out the rising costs associated with maintaining digital payment infrastructure, compliance with RBI regulations, and servicing expenses. “We don’t want to depend on government incentives. The solution is for the government to allow us to charge a low, controlled MDR (Merchant Discount Rate) of 25 BPS on UPI P2M transactions for merchants with turnovers above Rs 40 lakh. Smaller merchants can continue with Zero MDR,” he added.
UPI’s Growing Dominance
Despite funding concerns, UPI remains India’s leading digital payments system. According to NPCI data, UPI processed:
- 131.12 billion transactions in FY24
- Rs 200 trillion in total transaction value
- Over 400 million users, accounting for 75% of all digital transactions in India
While the UPI incentive scheme is a positive step towards digital payment adoption, experts argue that for sustained growth and financial viability, a long-term revenue model—beyond government incentives—must be implemented.
