Stories
UPI MDR: The Hidden Cost Making Small Personal Loans More Expensive
- •The new UPI MDR, effective October 15, could inadvertently increase the cost of small personal loans, particularly those originated by fintechs and NBFCs.
- •A 0.4% MDR on P2M UPI transactions above ’2,000 applies to the entire loan repayment, not just the interest, significantly impacting lenders' yields.
- •For a ’20,000 six-month loan, the MDR could reduce annualised yields from 30% to 28.6%, a 144-basis-point impact.
- •UPI AutoPay is not a reliable solution due to high transaction declines and mandate revocations, meaning lenders still face MDR charges.
- •While existing loans absorb the cost, future loans may see increased pricing as lenders pass on these additional operational expenses to borrowers.
Key Questions Answered
Starting October 15, eligible P2M UPI transactions above ₹2,000 will incur a 0.4% MDR, which applies to the entire repayment amount including principal. For lenders offering small-ticket personal loans, this can reduce annualized yields by up to several basis points—such as a 144-basis-point impact on a six-month loan—eating into lender margins.
UPI AutoPay does not guarantee successful collections, as NPCI data reveals business declines averaging nearly 74% across major banks due to insufficient funds. Additionally, over 20 million AutoPay mandates were revoked monthly because customers lacked the necessary funds to fulfill them.
Financial institutions are assigned Merchant Category Code (MCC) 6012, which attracts a 0.4% MDR along with an 18% GST, where only 50% of that tax is available as input credit. In contrast, MCC 7322 is assigned to debt-collection agencies and carries a fixed MDR of ₹5.
