Bank Stocks Gain as UPI MDR Opens New Revenue Stream, Rate Hike Expectations Build

The immediate trigger for banking stocks was the introduction of a Merchant Discount Rate on certain UPI transactions. 

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The National Payments Corporation of India introduced an MDR of up to 0.4% on person-to-merchant UPI payments exceeding ₹2,000. The new charge will take effect from October 15. 

Merchants pay the fee to banks that process these transactions, with part of the amount also going to payment applications such as Google Pay and PhonePe that facilitate the payments. 

How the fee will ultimately be divided among banks, payment processors and NPCI has not yet been clarified. 

An estimate cited in the Moneycontrol report puts the potential annual revenue pool from the change at ₹16,000-17,000 crore. The estimate assumes that about 60% could go to banks, 25% to application providers and the remaining 15% to aggregators. 

The eventual financial benefit, however, will depend on factors including the mix of transactions, applicable exemptions and the final sharing arrangement between participants in the payment ecosystem. 

Interest-rate expectations add to banking-sector move 

Banks were also in focus ahead of the US Federal Reserve’s monetary policy decision later in the day. 

Nearly 93% of investors expected the Federal Reserve to raise interest rates to a range of 3.75-4%, according to the CME FedWatch tool cited in the report. 

Expectations have also emerged that the Reserve Bank of India could raise its repo rate from the current 5.25% as inflation moves higher. 

For banks, higher lending rates can provide room to reprice loans, although the actual impact on margins depends on how borrowing costs and deposit rates move alongside lending rates. 

Wednesday’s gains therefore came as investors assessed two developments at the same time: a potential new source of income from eligible UPI merchant payments and the possibility of a shift towards higher interest rates. 

With the UPI MDR scheduled to take effect on October 15, the eventual division of the fee among banks and other payment participants remains one of the key details yet to be determined.