Will UPI MDR make small loans costlier?

According to fresh market updates, The government’s clarification on UPI Merchant Discount Rate (MDR) could have significant implications for lenders that collect loan EMIs through UPI. While the MDR cannot be directly passed on to borrowers, a financial expert opines that lenders may face an additional transaction cost when borrowers pay EMIs above Rs 2,000 through UPI. Automatic payments through UPI mandates, that stated, do not attract MDR.

The NPCI, on September 15, 2026, clarified that automated recurring standing instructions, known as UPI Mandates or AutoPay, do not incur the prescribed MDR transaction charges. Payments set up via automated recurring transfers for monthly utility bills, OTT streaming subscriptions, and all recurring investments will not incur any prescribed MDR charge.

This raises practical questions around how UPI MDR on manual transactions above Rs 2,000 could affect lenders, including its impact on lender margins and loan pricing, and whether the rule could encourage wider adoption of autopay mandates and other automated repayment options.

Here's an edited excerpt from a written response by Adhil Shetty, CEO of BankBazaar.

Will UPI MDR make small-ticket loans costlier?

Lenders cannot pass this fee on to borrowers directly, since the government has explicitly barred merchants, including lenders, from charging MDR to customers, and banks have been told to ensure this rule is followed. The MDR itself applies on the lender's side of the transaction when an EMI above Rs 2,000 is paid manually through UPI, and is shared between banks and payment providers rather than charged to the customer. Borrowers won't see a new fee appear on their EMI, because that is exactly what the rule was designed to prevent.

How could UPI MDR affect lender margins and loan pricing?

The fee applies only when a borrower pays an EMI manually via UPI, and the amount is above Rs 2,000. If the EMI is collected automatically through a mandate, like autopay, there's no fee at all. This gives lenders a simple, practical reason to encourage borrowers to set up automatic EMI payments instead of paying each month manually, since it avoids the cost entirely for both sides.

Could UPI MDR accelerate the shift to alternative repayments?

The borrowers most likely to be affected are those with EMIs above Rs 2,000 who pay manually rather than on autopay. Anyone with a smaller EMI, below Rs 2,000, isn't touched by this rule at all, regardless of loan size or tenure. Whether specific sectors or lenders will feel this more than others isn't something we can say yet, since there's no official data on that split so far.