Price regulation of UPI

Widespread public discussion has been sparked by the RBI’s most recent discussion paper on fees in payment systems, particularly with regard to the UPI transactions’ zero-fee foundation.

Why RBI wants to intervene?

Two important reasons:

Goals of financial inclusion: Viewing digital payments as a public good and

Addressing market failures: Such as the presence of dominant firms or externalities that may arise due to the two-sided nature of this market.

For both objectives, regulators might want to cap or set to zero the MDR or merchant discount rate (paid by merchants to their payments service provider) or the interchange fee (paid by the acquiring bank to the issuing bank), or both.

What is the present scenario of Pricing UPI?

Subsidies on operational cost: In the case of UPI, the government subsidizes the operational costs of facilitating UPI transactions, which is reportedly inadequate. In January 2022, the Payments Council of India reported that the industry expected a loss of Rs 5,500 crore.

Subsidies are inadequate: Even with a public good motive, in the absence of evidence, one cannot assume this to be the best allocation of limited government resources. As per the Indian Digital Payments Report (second quarter of 2022), the average ticket size of P2M transactions (person to merchant) on UPI is Rs 820. RBI’s estimated cost of Rs 2 for processing a Rs 800 transaction, is 0.25 per cent of the transaction value, much lower than the MDR cap set at 0.9 per cent for debit cards and an MDR of 2 per cent being pro- posed for RuPay credit cards on UPI.

Presently MDR is Zero: A floor MDR of 0.25 per cent is, therefore, not unreasonable. Arguably, these are substitutable services competing for the same pool of merchants. Policymakers must also bear in mind behavioural challenges in moving from zero MDR to a positive MDR. Anchored at a zero MDR since January 2020, merchants, especially ones with thin margins, may hesitate to accept an increase in MDR, even if they benefit on net terms.

How RBI can regulate price?

Understanding what to regulate: In order to understand how and what to regulate, we borrow from the rationale followed for other two-sided markets that exhibit cross-platform externalities. consumers benefit more if the size of the merchant network accepting a payment instrument (for example, debit cards) is larger and, at the same time, merchants benefit more if many consumers use debit cards.

Recovering the cost from merchants: Card networks like Visa and Mastercard compete for banks, usually not too many, to issue their cards. Since the acquiring bank must pay the interchange fee, they recover these costs from merchants.

Regulating the interchange fee: In most jurisdictions, the interchange fee is regulated to prevent banks from charging exploitative rates and the MDR is left to be commercially determined. This is also done for administrative ease, since banks are fewer, while monitoring bank-merchant contracts can be onerous.

Charging the MDR: In the UPI parallel, involving payment service providers of payers and payees, the remitter and beneficiary banks as well as NPCI, RBI could either regulate the inter change fee between payment service providers or the merchant discount rate charged by them.

Deciding between MDR and interchange fee: The market for merchant acquisition is usually more competitive and can be left unregulated, and if necessary, the interchange fee between the two payment service providers can be regulated. If both markets are sufficiently competitive, regulation could mean establishing a floor/ cap charge. The decision what to regulate is, therefore, crucial.

Example of telecom industry: A related example is available in the telecom industry where facilities provision is regulated through the interconnection fee, while retail prices for the relatively competitive telecom services segment are left to the market. For externalities of the two-sided market to be internalized, the choice of instrument must be carefully evaluated.

Determining the actual price: The next step is to determine the price level, which is a lot trickier. Drawing from economic theory, the optimal level would depend on whether the regulator cares only about consumer welfare (as op- posed to total welfare), and whether the issuing and acquiring banks make positive margins on each transaction.

How digital payment is charged around the world and India’s requirement?

Example of PIX of Brazil: Pix, a two-year-old interoperable digital payments system in Brazil, provides a good comparison of how price setting might be considered in the UPI context. Pix does not regulate MDR, payment service providers have the freedom to set MDR, though in practice most banks currently don’t charge an MDR, largely to onboard more merchants on their platforms.

MDR appears less attractive: The indicated cost is R$ 0.01 for each 10 transfers, or 16 paise in Indian rupees for every s10 transactions. This is substantially lower than the costs estimated for India and is also perhaps the reason why payment service providers are not immediately inclined to recover costs through MDR.

Not hampering the innovation and investment: In general, benefits of regulatory intervention should outweigh the costs of intervening. The costs of intervening not only include the administrative costs, but also potential costs arising from setting the wrong interchange fee or cap, as well as any costs arising from the impact of the intervention on future investment and innovation in the market.

Unrecognized Madrasas and Government’s role

There has been a lot of unhappiness about the UP-government’s decision to conduct a survey of unrecognized madrasas in Uttar Pradesh.

What is the intention of Government behind such survey?

The government’s claim: The survey being an exercise to help the madrasas and their students has been less than convincing.

Questionable intention: In the past, the government has called into question the patriotism of madrasa students by asking their management to hoist the national flag on Independence Day, record the proceedings, and submit the same to the local magistrate.

What is the status of unrecognized madrasas?

Lack of direction: Most are floundering for lack of direction. Many impart elementary theological instruction through semieducated teachers.

Dependence on community funding: If at all there, secular education is, at best, piecemeal. Madrasas depend almost fully on community funding.

Funding cut with covid19: With the economic downturn first post demonetization and then postCOVID19, that funding has reduced to a trickle. Under normal circumstances, an institute pressed for funds cuts down on expansion plans or puts new courses on hold.

Existential crisis for madrasa: It has become an existential crisis for tens of thousands of students. The dwindling community sponsorship has translated into less food to eat and no warm clothes for them. If that makes it seem as though the madrasas’ prime purpose is to feed and clothe the needy, the reality is not entirely different.

Feeding and imparting the literacy: Most students are first generation learners. Many of them are sent by parents with the idea that there will be one less mouth to feed at home. For poverty-stricken parents, the madrasas’ free boarding and lodging is a blessing. The education is often considered a bonus. The Much-maligned madrasas feed the hungry and impart literacy.

What the case studies reveal about education via unrecognizes madrasas?

Example of CBSE along with Quran: Jamiatul Hamd in Gautam Buddha Nagar district is a rare madrasa which encouraged its students to take the Central Board of Secondary Education exams alongside learning to be Hafize Quran (one who has memorized the Quran).

Shortage of funds: The madrasa is so short of funds that the management does not know where the next meal for the students will come from. In the past, Good Samaritans sent packs of rice, lentils, wheat flour and cooking oil.

Decline in sponsorship: Sponsorship has come down drastically, leaving the students with the prospect of going to bed hungry. Also, 40% of the students in this madrasa who went back home during the COVID19 pandemic did not return.

Jamia Mahade Noor madrasa in Dadri: Where 30% of the students dropped out after COVID19. Day scholars face an uncertain future. Some teachers could not be retained due to paucity of funds.

Closing down of madrasa: The cash-strapped Jamia Naseeriya Islamia in Ghaziabad closed down its wing for outstation students. In mosques across Uttar Pradesh, community aid is sought for unrecognized madrasas after daily prayers.

Fear about survey: In almost every madrasa, there are lingering apprehensions about their fate after the survey. Many packed off their outstation students in panic when the survey started. The students may never return.

Some student never returned: Incidentally, these schools had also sent back their outstation students after the nationwide lockdown was imposed in March 2020. Many students did not return as their parents got them employed as either farm labourers or at sundry tea shops or eateries. A student who may have at one time dreamed of becoming a scholar of Islam is now a menial worker.

What government can do?

Upholding the Constitutional right: According to constitution the Right of a citizen not to be denied admission into state maintained and state-aided institution on the ground only of religion, race, caste, or language [Art.29(2)2]-” No citizen shall be denied admission into any educational institution maintained by the State or receiving aid out of State funds on grounds only of religion, race, caste, language or any of them”

Survey for collecting the data: Aim of survey should not be harassment but the know the status of madrasa and they’re by collecting the data to draft policy for educational and social upliftment of students of madrasa.

Recognition of madrasa: Following the due procedure of law government can seek Registration and recognition of madrasa.

Financial assistance to madrasa: State government can provide the one-time financial assistance for and after the feedback and review state may continue the funding.

Education should be the priority: Government objective should be the modern education of those who are getting poor quality of education. Any constitutional or legal hindrances should not be the excuse to provide the help to needy.

How is India planning to end Child Marriage?

The steering committee of a UNFPA-UNICEF Global Programme to End Child Marriage is on a visit to India to witness state interventions that have helped reduce the prevalence of child marriage.

Why such visit?

The UNFPA-UNICEF estimates that 10 million children could become child brides as a result of the pandemic globally.

What is Child Marriage?

Child marriage refers to any formal marriage or informal union between a child under the age of 18 and an adult and another child.

The Prohibition of Child Marriage (Amendment) Bill, 2021, fixes 21 years as the marriageable age for women.

Reasons behind its prevalence

Role of poverty: A large proportion of child marriages take place primarily because of poverty and the burden of the huge costs of dowry associated with delayed marriages.

Norms: It is because of social norms in many regions and cultures that parents begin preparations for a girl’s marriage once she has reached puberty.

Crisis: Conflict increases the inequalities that make girls vulnerable to child marriage – and its consequences. Families may arrange marriages for girls, believing marriage will protect their daughters from violence.

Issues with Child Marriage

(1) Social implications

Impacts girl child more: Globally, the prevalence of child marriage among boys is just one sixth that among girls.

Leads to deprivation: Child marriage robs girls of their childhood and threatens their lives and health.

Exclusion: The practice can also isolate girls from family and friends and exclude them from participating in their communities, taking a heavy toll on their physical and psychological well-being.

Academic loss: Girls who marry before 18 are more likely to experience domestic violence and less likely to remain in school.

(2) Health issues

Life threats: Child brides often become pregnant during adolescence, when the risk of mortality during for themselves and their infants.

Forced pregnancy: Girls are forced into adulthood before they is physically and mentally ready. This is the main cause of global prevalence of malnutrition.

(3) Economic impacts

Child marriage negatively affects the Indian economy and can lead to an intergenerational cycle of poverty.

It suddenly pulls out the children involved out of workforce before they grow as adult.

Girls and boys married as children more likely lack the skills, knowledge and job prospects needed to lift their families out of poverty and contribute to their country’s social and economic growth.

What is the situation in the world?

According to data from UNICEF, the total number of girls married in childhood stands at 12 million per year.

It strives to end the practice by 2030 — the target set out in the Sustainable Development Goals.

Laws and policy interventions in India

There are crucial laws that aim at protecting children from violation of human and other rights including the-

Prohibition of Child Marriage Act, 2006 and

Protection of Children from Sexual Offences Act, 2012

Raising the age of marriage: A parliamentary standing committee is weighing the pros and cons of raising the age of marriage for women to 21, which has been cleared by the Union Cabinet.

Beti Bachao Beti Padhao Scheme: It aims to address the issue of the declining child sex ratio image (CSR).

Kanyashree scheme: West Bengal’s scheme offers financial aid to girls wanting to pursue higher studies, though women’s activists have pointed. Bihar and other States have been implementing a cycle scheme to ensure girls reach safely to school, and UP has a scheme to encourage girls to go back to school.