What this edition covers
This month, we examine the key regulatory changes shaping India’s fintech and payments ecosystem:
- Main Course 1 | Putting a Price on UPI: India has opened the door to MDR on select UPI merchant payments. The key questions are who will pay, how MDR should be shared across the payments ecosystem, and how to keep UPI free for consumers while making the system financially sustainable.
- Main Course 2 | RBI’s proposed ban on revolving credit: RBI plans to restrict NBFCs from offering revolving credit facilities, raising concerns for MSMEs that rely on reusable working-capital lines. The proposed framework could reshape flexi-loans, supply-chain finance and other digital credit products.
- Dessert | Device locking for loan recovery: From January 2027, lenders may use technology to restrict financed devices after prolonged loan delinquency, subject to safeguards. The framework sets limits on when and how devices can be locked and protects essential functions and borrower data.
- Mints | Quick bites: Other key fintech developments.
‘…Someone will have to pay the cost.’
- Mr. Sanjay Malhotra, RBI Governor
While talking about UPI earlier this month, RBI Governor Sanjay Malhotra offered perhaps the neatest seven-word summary of the debate around India’s favourite payment method.
For six years, UPI has cost users and merchants nothing. That helped turn it from another payment option into a daily habit. Today, it is difficult to imagine buying anything from a cup of chai to a television without first looking for a UPI QR code. In July 2026 alone, UPI processed 2,366 crore transactions worth Rs. 29.9 lakh crore.
But UPI may now be entering its next phase. The Government has opened the door to a limited Merchant Discount Rate (MDR) – the fee merchants pay payment processors for accepting digital payments – on certain transactions. At the same time, it has assured that UPI will continue to be free for ordinary users.
That leaves India with an interesting design challenge: how do you put a price on UPI without taking away the magic of ‘free’?
In this month’s first Main Course, we look at UPI’s possible shift away from zero MDR, who should pay if charges return, and how India can build a more sustainable payments ecosystem without undoing the gains of the last six years.
Let’s dive in.
Main Course 1 🥘
Putting a Price on UPI
India has opened the door to MDR on select UPI merchant payments. The harder question is how to charge for UPI without making users pay, pushing merchants away, or weakening incentives to keep investing in the ecosystem.
First, what exactly has changed?
On 10 August 2026, Parliament cleared the Taxation and Other Laws (Amendment) Bill, 2026. Tucked among its tax amendments is a small but important change to Section 10A of the Payment and Settlement Systems Act, 2007 (PSS Act).
Until now, Section 10A tied the prohibition on payment charges to electronic payment modes prescribed under Section 269SU of the Income-tax Act. That list included UPI and RuPay debit cards. The Bill replaces this fixed cross-reference with a more flexible formulation. The zero-charge requirement will now apply to electronic payment modes specified by the Central Government through notification.
The amendment does not itself introduce MDR on UPI. It instead gives the Government the flexibility to decide which payment modes must remain charge-free. UPI could therefore be left partly outside a future zero-charge notification.
The Finance Ministry has already indicated how it is thinking about this flexibility. Consumers will continue to face no transaction charges, all person-to-person (P2P) UPI transactions will remain free, and any MDR, if introduced, would apply only to a limited set of merchant transactions above a specified threshold. The details are yet to be worked out. The Ministry has said that the NPCI-led UPI and Services Steering Committee will determine the MDR framework.
So, UPI MDR is now a real possibility.
How did we get here?
The story starts in January 2020.
Before then, UPI person-to-merchant (P2M) transactions could attract MDR of up to 0.30%. The Government then moved UPI to a zero-MDR regime to accelerate digital-payment adoption and encourage people and businesses to move away from cash.
It subsequently used incentive schemes to support the ecosystem. For example, the FY 2024-25 scheme paid a 0.15% incentive on eligible UPI transactions of up to Rs. 2,000 made to small merchants.
That bargain worked spectacularly well for adoption. But UPI today looks very different from UPI in 2020. Its scale has grown dramatically, while the gap between what the system costs and what the Government subsidises has become harder to ignore.
The Standing Committee on Finance’s 32nd Report, presented on 12 March, expressed concern that only Rs. 2,000 crores has been budgeted for the UPI and RuPay incentive scheme for FY 2026-27, against an industry-estimated cost of roughly Rs. 20,700 crores for processing UPI merchant transactions.
In its response, in the Standing Committee on Finance’s 44th Action Taken Report, the Department of Financial Services presented UPI monetisation as one possible solution. It is examining two options: restoring MDR for certain high-threshold transactions or merchants, and introducing a tiered incentive structure that gradually phases out government support. No threshold, merchant category or timeline has yet been finalised.
The path for UPI monetization is set. Now, the challenge is designing a sustainable revenue model without undoing what made UPI successful.
Keeping UPI free for customers
The Government has been categorical that consumers will not be charged for UPI. But saying that the merchant is legally liable for MDR does not necessarily determine who ultimately bears its economic cost.
A merchant facing a new payment cost has choices. It can absorb the fee. It can increase prices. Or it can try to recover the amount separately from customers. This is not a new problem for payment regulation. When the RBI rationalised debit-card MDR in 2017, it specifically directed banks to ensure that merchants did not pass MDR charges on to customers.
The same question will arise for UPI. Even where there is no visible surcharge, merchants may factor the new cost into prices. This is why the eventual framework must have clear anti-surcharging rules and monitoring of payment-specific fees.
Making sure merchants continue to prefer UPI
For six years, merchants have accepted standard UPI payments at zero MDR. Introduce a fee suddenly, particularly on the basis of transaction value, and merchants may start adapting around it. A merchant could discourage higher-value UPI payments or bills could be split to remain below a transaction threshold.
A pure transaction-value threshold is easy to understand, but also easy to game. A merchant-turnover test protects small businesses better, but adds compliance complexity in terms of differentiating between large and small merchants. A hybrid model could potentially do both: protect smaller merchants entirely while applying a low MDR only to larger merchants and higher-value payments.
It may also make sense to test the structure before deploying it across UPI. A limited pilot could reveal whether merchants split transactions, disable particular payment options or simply absorb the fee. The final model could then be calibrated using actual merchant behaviour rather than assumptions.
Introduce equitable MDR sharing scheme
Introducing MDR will also raise another question: who gets how much?
UPI is supported by multiple participants.
The payer side includes customers’ banks and payment apps, which onboard users, authenticate transactions, manage fraud, and keep enormous transaction volumes moving around the clock.
NPCI keeps the underlying payment rail running and resilient.
The payee side includes acquiring banks and payment aggregators, which onboard merchants, integrate payment systems, maintain merchant-facing infrastructure, and support settlements.
If UPI monetisation is introduced, it would be useful for the Government to notify not only the MDR rates, but also the principles governing how that revenue is distributed across the ecosystem.
The eventual split should reflect the actual costs and work performed on UPI, rather than simply importing a card-era interchange structure.
In particular, the acquiring side should not be left with only the residual amount after everyone else has been paid. Much of UPI’s next phase of growth will depend on acquiring banks and payment aggregators. If India wants more merchants, better integrations, and stronger payment infrastructure, the entities investing in those functions need a meaningful economic incentive to continue doing so.
Do not retire the subsidy too quickly
An MDR framework also does not have to mean the end of government support.
If larger merchants and higher-value transactions begin contributing through MDR, government incentives can become more targeted rather than disappearing altogether.
The objective could shift from subsidising scale to subsidising the things that the market may otherwise under-invest in or need more support. These range from onboarding small merchants and expanding acceptance in underserved areas to improving system reliability and helping smaller ecosystem participants compete.
What’s next
UPI has won on scale. The next test is revenue model. The remarkable thing about UPI is that, for the user, an extraordinarily complicated payment system has come to feel almost invisible. Its next revenue model should try to preserve exactly that. UPI does need someone to pay the cost. The trick is making sure most of us barely notice.
Main Course 2
Draw, repay, repeat? RBI says not for NBFCs
The RBI’s draft ban on revolving credit is aimed at evergreening, but as drafted it could take away the working-capital structure many MSMEs depend on most.
What is changing?
On 6 August 2026, the RBI released draft amendments to the NBFC Credit Facilities Directions, 2025. The proposed rule is simple. NBFCs may offer term loans, but not revolving credit products. The only exception is for NBFCs authorized by the RBI to issue credit cards. Comments on the draft are open until 28 August 2026.
The draft also defines a term loan for the first time. It must have a fixed principal amount. The money may be disbursed in one or more instalments. But it must be repaid according to a predetermined schedule. Most importantly, once any part of the principal is repaid, the available limit cannot be restored. Any fund-based facility that does not meet these conditions will be treated as revolving credit.
The proposal applies only to NBFCs. Banks remain outside its scope. They may continue to offer cash credit and overdraft facilities, both of which allow borrowers to draw, repay and redraw within a sanctioned limit.
The amendments will take effect immediately once notified. The draft does not provide a transition period for existing products or facilities.
The real impact may be on MSMEs
The most visible impact will be on NBFCs. Flexi-loans, overdraft-style products, reusable digital credit lines and some supply-chain finance products may need to be discontinued or redesigned.
But the deeper impact will be felt by borrowers, particularly MSMEs.
A small business rarely needs all its working capital on one day. It may need money to buy stock before a festive season. It may then repay the lender when customers pay their invoices. A revolving facility follows this cycle. The business draws money when it needs it and pays interest only on the amount used.
A term loan can also be disbursed in tranches. But every repayment permanently reduces the available limit. The borrower must then seek a fresh sanction to borrow again. This creates delay and borrower incurs repeated processing costs.
This matters because NBFCs often serve borrowers whom banks do not serve easily. These include thin-file and new-to-credit MSMEs. They may have little conventional collateral or limited credit history. But they may still have regular business activity and predictable cash flows.
Many such borrowers operate in semi-urban and rural markets where banks have a thinner presence. For them, a reusable working-capital line is not simply a convenient product. It may be the structure that best matches how their business earns and spends money. Removing that structure could push them towards more expensive formal credit or, worse, informal borrowing.
The industry is making a similar case to the RBI against the prohibition. NBFCs are reportedly preparing a formal representation warning that the proposed ban could affect existing revolving-credit products with an AUM (assets-under-management) of more than Rs. 2 lakh crores, nearly 90% of which cater to MSMEs and individuals.
Why is the RBI concerned?
The draft does not expressly explain the reason for the restriction. The likely concern is evergreening.
A revolving facility allows a borrower to redraw against a repaid limit. That flexibility can be misused. Fresh credit may be used to repay an earlier drawdown. The account may continue to appear regular even when the borrower’s underlying financial position is worsening.
A bank may have greater visibility into this cycle, especially when it maintains the borrower’s current account. It can see whether repayment is coming from genuine business receipts or from fresh borrowing. An NBFC cannot accept demand deposits. It often does not have the same view of the borrower’s operating cash flows.
That concern is valid. But it does not apply equally to every revolving product.
The case for restriction is strongest for an open-ended, unsecured consumption credit line. Such a product may have no fixed principal repayment date. The borrower may keep rolling the balance by paying only a small portion of the amount due.
The case is weaker where each drawdown has its own contractual due date. If the borrower misses that date, the stress becomes visible. It is also weaker where the facility is backed by collateral that is regularly valued and can be enforced. A fall in collateral cover provides an additional and measurable warning signal.
The draft does not make these distinctions. It regulates the structure of the facility even though the risk often depends on how the facility is designed and monitored.
A more measured path
The RBI can address evergreening without closing every form of revolving credit.
The first step could be a specific carve-out for supply-chain finance. This is not the same as an open-ended credit card facility. A supply-chain finance is commonly structured as a series of short-term loans. Each tranche typically runs for 30 to 180 days and has its own repayment date.
The structure can also carry strong safeguards. Every drawdown can have a fixed maturity. New disbursements can stop as soon as a tranche becomes overdue. A borrower should not be allowed to roll over the balance by paying only interest or a small part of the principal. The entire exposure can be classified based on the oldest overdue tranche. The lender can also monitor the underlying invoice, the end-use of funds and payments received from the buyer.
These controls directly address the risk of evergreening. They also preserve a product that helps MSMEs fund inventory, invoices and seasonal business needs.
The second step could be to permit secured revolving facilities. This can be limited to cases where the collateral is clearly identified, legally enforceable and regularly valued. The RBI could prescribe conservative loan-to-value ratios and margins. It could also require lenders to stop further drawings when the value of the security falls below the prescribed level.
These facilities should be subject to clear repayment triggers, regular credit reviews and early-warning systems. They should also carry transparent rules on valuation, margin calls and asset classification. This would allow the RBI to control the risk without treating a well-secured business facility like an unsecured consumption line.
Takeaway
The RBI is right to close the door on credit that can be rolled over forever without revealing borrower stress. But it should not close the working-capital products that many MSMEs depend on.
The better rule is not ‘no revolving credit’. It is ‘no revolving credit without a clear repayment trigger, transparent end-use and strong risk controls’.
Dessert 🍨
Phone on EMI? RBI Has Set the Locking Rules
RBI has allowed lenders to restrict financed devices after loan defaults, but only with strict safeguards to protect borrowers and essential device functions.
From 1 January 2027, lenders may use technology to restrict the functions of phones, tablets and laptops purchased using their loans. But they cannot lock a device immediately. Restrictions can begin only when the loan is 30 days overdue and must be introduced gradually. Full restrictions, including on outgoing calls, are permitted only after 60 days. This power is limited to the particular device financed by the lender.
The RBI has also built in safeguards. Incoming calls, SMS, emergency features and functions needed for borrower’s work must remain available. Lenders cannot access the borrower’s contacts, messages, photos or location data. Once the dues are paid, restrictions must be reversed within an hour. A wrongful lock or delayed reversal attracts compensation of Rs. 250 per hour, capped at the loan amount. Device-locking has therefore received regulatory approval, but only as a controlled recovery tool.
Mints 🍃
💰 RBI proposes common interest rate framework for lenders
RBI has proposed a harmonized, principles-based framework for pricing both fixed and floating-rate loans across banks, NBFCs and other regulated lenders. The draft seeks to address gaps and divergent practices in the existing rules, including around benchmark-linked lending and fixed-rate loans. Final directions will be issued separately for each category of regulated entity after consultation, with comments due by 11 September 2026.
🎯 India to roll out CKYC 2.0 across financial sector by August end
India is rolling out CKYC 2.0 from August 2026. The upgraded system will introduce real-time KYC updates and confidence scores for customer records. The changes are aimed at reducing duplication, improving data quality and making KYC reusable across financial institutions easier.
⚖️ Fintech firms raise concerns over NPCI's proposed UPI Meta framework
Seven fintech companies, including Paytm, Navi, CRED and BharatPe, have asked NPCI to consult the industry more widely before introducing the proposed UPI Meta checkout framework. The framework would let users save a preferred UPI app on merchant platforms for faster payments. The companies worry this could favour default apps and make it harder for smaller UPI players to compete. They also say the current checkout process already works well, with no clear evidence that the new framework would improve customer experience.
₿ RBI reiterates stance against legalising crypto assets
RBI has reiterated its opposition to legalising crypto assets, favouring a containment strategy that leans towards prohibition. It wants banks and regulated entities insulated from crypto and private stablecoins, citing risks to financial stability, monetary sovereignty and illicit finance. Instead, RBI is backing CBDC and other regulated digital payment infrastructure.
📶 NPCI plans offline UPI payments through certified PoS terminals
NPCI is developing a system for offline UPI payments through certified PoS terminals, to accept UPI payments even when both the customer’s phone and the merchant’s device are offline. The feature will use NFC technology and allow users to tap their phone to make payments using their preloaded UPI Lite balance. The payment will be stored on the terminal and processed once internet connectivity is restored. The feature is expected to improve digital payments in low connectivity areas such as aircraft cabins and underground metro networks.
🤖 SEBI deploys AI tools to strengthen surveillance of finfluencers
SEBI is using AI and data analytics to monitor financial content. Project Sudarsan tracks unsolicited investment advice and SEBI R(AI)DAR flags misleading financial advertisements. The measures aim to strengthen investor protection as investment advice increasingly moves to social media.
🔗 BRICS nations explore links between fast payment systems and CBDCs
BRICS countries are exploring links between their fast payment systems and CBDCs. The aim is to reduce cross-border payment costs. Options include connecting fast payment systems, making CBDCs interoperable and promoting local currencies for trade and payments.
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About FinTales
FinTales is Ikigai Law’s monthly fintech and digital economy newsletter. It tracks the regulatory shifts shaping India’s fintech ecosystem, from payments, digital lending, KYC, wealth-tech, insur-tech, AI in finance and data governance to product strategy, financial innovation and policy reform.
Author credits: This edition is authored by Astha Srivastava, Samyukta Iyer, Sidharth Chamarty and Pravi Jain with inputs from Aparajita Srivastava.
Image credits: AI-generated
For any queries, reach out to us at contact@ikigailaw.com
