Linking MDR to turnover gets tricky

MUMBAI: Challenges in determining the turnover of small businesses will likely impede the central bank's plan to link merchants' fee on digital purchases with their sales volumes, putting in question the increased adoption of plastic money in consumer transactions that had hitherto relied largely on cash.
The Reserve Bank of India has proposed that the extra charge, popularly called merchant discount rate (MDR), would be in kilter with the seller's turnover. It has suggested a 0.4% charge on transactions for merchants below `20 lakh in annual turnover, and 0.95% for those above `20 lakh. It has also suggested a ten-basis-point dis count for transactions via QR Codes and other smartphone based digital transactions.

“The biggest question is how do we classify merchants when in most cases their actual numbers are hidden from assessment of bank officials: They are mostly reluctant to share the correct information with us,“ said Harjeet Toor, head, cards, retail and MSME loans at RBL Bank.

The push toward digital transactions gained currency after India overnight withdrew 500and 1,000-rupee bills from circulation on November 8, seeking to simultaneously reduce the size of a parallel economy and to prevent counterfeiting. While sections in the government believe charges on digital payments were a disincentive for people to shift to digital transactions from cash, bankers say most merchants tend to use cash to remain anonymous and prevent bigger incidence of income tax.

A report released by global investment banking firm Jefferies said the categorisation of merchants complicates things for banks with deciding of MDR becoming even more difficult in case of merchants providing a bunch of services and products under different categories.

“We have found that merchants keep multiple account books, one for banks as their chartered accountants tell them to do: The other is where they calculate their actual earnings,“ said a senior banker with a Mumbaibased private bank.

“Deciding how much to lend to them is anyway a big challenge for us, and the same will be the case when we have to decide their MDR.“

The State Bank of India has decided to levy the merchant rates on the basis of the declaration given by the merchants on their annual turnover.