RBI
The Hidden IRR Tax: What UPI's New MDR Really Costs NBFC Lenders
From 15 October 2026, UPI transactions above ₹2,000 will attract a Merchant Discount Rate (MDR) of 0.4% in specified merchant payment categories. The introduction of UPI MDR for NBFCs raises a practical question: what happens when a UPI payment is made for an EMI or loan repayment rather than a retail purchase?
As digital lenders increasingly use UPI for loan collections, even a small charge on each eligible transaction can add to the cost of servicing a loan book. The impact will depend on factors such as loan ticket size, repayment frequency, collection channel, and the share of repayments made through eligible UPI transactions. For NBFCs, understanding how the new MDR framework applies to loan repayments will therefore be important for assessing its potential impact on collection costs and lending economics.
What Changed From 15 October 2026?
Until now, UPI payments have operated under a zero-MDR framework for the transactions covered by the Government's protection against charges. A notification dated 14 September 2026 now specifies UPI transactions up to ₹2,000 as zero-charge transactions. This means UPI transactions above ₹2,000 can fall within the MDR framework, subject to the applicable category and rate.
Under the new framework, the general P2M rate is:
· Up to ₹2,000: Nil MDR
· Above ₹2,000: 0.4% of the transaction value
· ₹75,000 and above: MDR capped at ₹300 per transaction
The framework applies from 15 October 2026.
There are also specific categories with different rates. The NPCI framework provides a flat ₹5 charge for transactions falling under the Debt Collection Industry Program category, while certain capital market transactions carry an MDR of 0.02%, subject to the applicable cap.
For lenders, the important question is where loan repayments sit within this structure.
UPI MDR for NBFCs: Does It Apply to NBFC Loan Repayments?
The notification and NPCI circular do not create a separate MDR category specifically for lending transactions. The issue arises because a lender receiving an EMI through a merchant-enabled UPI collection account can potentially fall within the P2M framework. Financial services are generally associated with MCC 6012, and the treatment of a lender's UPI collection flow will depend on how the transaction is classified and onboarded by the acquiring bank.
This makes the way a lender receives payments important.
A borrower making a one-time UPI payment to the lender's merchant account for an EMI or overdue amount above ₹2,000 could attract the applicable MDR.
That does not mean every UPI transaction connected with lending will attract MDR. The nature of the transaction, the payment flow and the merchant onboarding structure matter.
Where Could NBFCs See the Impact?
UPI is now used at several points in the lending lifecycle. The MDR question, however, does not apply equally to all of them.
Loan disbursement
A lender transferring money to a borrower is not a P2M payment. The MDR framework is focused on payments made by a person to a merchant. Therefore, a loan disbursement through UPI is not affected in the same way as a borrower-initiated repayment.
Manual EMI payments
This is the key area for lenders. If a borrower makes a manual UPI payment above ₹2,000 to the lender's eligible merchant or collection account, the payment could attract MDR at 0.4%, subject to the ₹300 per-transaction cap.
Failed AutoPay payments
A failed mandate can create another point of exposure. If an automated EMI collection fails and the borrower subsequently makes a manual UPI payment above ₹2,000, that replacement transaction could fall within the applicable MDR framework.
UPI AutoPay
Mandate-based recurring payments receive different treatment. Automated recurring standing instructions, including eligible UPI AutoPay transactions, are treated separately from ordinary manual P2M payments.
For lenders, this makes mandate-based collections particularly relevant when reviewing the potential cost of the new MDR framework.
Repayments of ₹2,000 or less
Transactions up to ₹2,000 remain under the zero-charge provision. This could reduce the impact for certain small-ticket loan portfolios, depending on their repayment structure.
Credit-funded UPI transactions
UPI transactions made through credit card-linked UPI or pre-sanctioned credit lines follow the applicable credit framework rather than simply being treated as ordinary bank-account-funded P2M payments.
The IRR Impact: A Simple Example
The 0.4% MDR may look small on a single transaction. The impact becomes clearer when the same cost is applied to every eligible EMI collected through the loan tenure.
Consider a hypothetical loan:
Principal: ₹1,00,000
Interest rate: 18% p.a.
Tenure: 12 months
Monthly EMI: approximately ₹9,168
Assume all 12 EMIs are collected through manual UPI payments and each payment is subject to the 0.4% MDR.
On one ₹9,168 EMI, the MDR would be approximately ₹36.67.
Across 12 monthly instalments, that adds up to approximately ₹440 in payment costs.
That may not look significant against a ₹1 lakh loan. But the more relevant question is what happens when the cost is incorporated into the lender's actual cash flows.
That is the direct collection cost. On this illustrative loan, the lender's IRR can fall from 18% to approximately 17.23% after accounting for the MDR on each of the 12 EMI collections. That represents a reduction of around 77 basis points in the lender's effective return.
A 0.4% charge on an individual transaction therefore should not be viewed in isolation. When repeated across thousands or millions of eligible repayments, the cumulative cost can become meaningful. This is particularly relevant for NBFCs operating with large retail loan books, where small changes in collection costs can affect portfolio-level economics.
Can the Lender Recover the MDR From the Borrower?
The MDR is a charge within the merchant, acquiring bank and UPI ecosystem. Merchants cannot simply pass the MDR directly to customers as a separate charge.
For an NBFC, this means that adding a separate “UPI MDR charge” to an EMI simply to recover the MDR would not be an appropriate approach.
This does not mean that the overall cost of running a lending business can never influence pricing. A lender may consider its operating and collection costs when determining its overall commercial pricing and processing-fee structure. But that is different from directly passing a payment-system charge to the borrower.
Any pricing decision should also be reviewed against applicable RBI requirements, contractual terms, borrower disclosures and fair-practice requirements.
One of the more relevant provisions for lenders is the Debt Collection Industry Program. The applicable NPCI framework provides a flat ₹5 charge per transaction for specified debt collection transactions, including the relevant merchant category for debt collection agencies.
This can be materially lower than the general 0.4% rate for many transactions. However, a lender cannot simply choose the ₹5 rate for its own transactions.
The collection flow needs to be appropriately structured and onboarded under the relevant Industry Program category. Whether a particular collection arrangement qualifies would need to be confirmed with the acquiring bank and payment partners.
For lenders with substantial collections through agencies or dedicated collection arrangements, this is worth reviewing before the new framework takes effect.
What Does This Mean for NBFC Collection Strategy?
The new MDR framework gives lenders another reason to examine how borrowers repay their loans.
Mandate-based collections become more relevant.
If recurring EMI collections can be handled through UPI AutoPay or other suitable mandate-based mechanisms that fall outside the MDR framework, lenders may have a commercial reason to increase their use.
Lenders may need to review manual collection flows.
Manual UPI payments are particularly relevant for overdue amounts, missed EMI payments and one-time repayments. These transactions can have a different cost profile from regular mandate-based collections.
Collection architecture may need a closer look.
NBFCs that use collection agencies could examine whether eligible collection flows can be structured under the Debt Collection Industry Program. This should be treated as a payment architecture and onboarding question, not as a classification that a lender can claim unilaterally.
Lenders should assess the cost by portfolio rather than applying one assumption across the entire book. A lender with a large number of ₹2,000-or-less repayments will have a different exposure from one that collects ₹10,000 or ₹20,000 EMIs through manual UPI payments.
What Should NBFCs Review Before 15 October?
1. Map the payment mix
Calculate what percentage of EMI and overdue collections currently comes through UPI, NACH, cards, payment gateways and other channels.
2. Separate manual and mandate-based collections
Do not treat all UPI collections as one category. Identify the share coming through manual UPI payments versus UPI AutoPay or other mandate-based mechanisms.
3. Calculate the actual MDR exposure
Run the calculation using your actual loan ticket sizes, EMI amounts, tenure and repayment frequency.
4. Review collection onboarding
Speak with your acquiring bank and payment partners to understand how your existing collection accounts are classified and whether any eligible flows could fall under the Debt Collection Industry Program.
5. Review borrower-facing pricing
If the additional collection cost is being considered in the lender's broader pricing strategy, review the approach with the compliance and legal teams. A direct MDR surcharge on the borrower should not be used as a means of recovering the payment charge.
Before implementing any changes, NBFCs should also review these payment and collection changes as part of their broader NBFC compliance framework.
Conclusion
For NBFCs, understanding UPI MDR exposure is therefore becoming an important part of collection-cost and lending-economics planning. The new UPI MDR framework is more than a payment-system change for NBFCs. It can also become a collection-cost issue.
The impact will not be the same for every lender. It will depend on how the lender collects EMIs, how much of its portfolio uses UPI, the size of individual repayments and the proportion of payments made through eligible manual transactions.
For some lenders, the answer may lie in increasing the use of mandate-based collections. For others, reviewing collection-account structures and payment partners may be more relevant. Large lenders may also find it useful to model the effect of MDR at the portfolio level rather than looking at the cost of one transaction in isolation.
The key question for NBFCs is therefore not simply whether UPI now carries MDR.
It is how the new cost interacts with the way they collect, price and manage their loan book.
A 0.4% charge on one EMI may appear small. Across a large number of eligible repayments, it can become a measurable cost of lending. Understanding that exposure before 15 October 2026 gives lenders time to review their collection architecture, payment mix and overall lending economics.