[India Compliance] Passage of Amendments to Indian Banking and Payment Laws in the Lok Sabha

Understanding India’s Banking and Payment Law Amendments

-Potential Introduction of Merchant Discount Rate (MDR) on UPI: A Comprehensive Analysis of Impacts on Korean Enterprises- In the Parliament of India, the passage of a bill through the Lower House ( Lok Sabha ) does not always make major economic headlines. Bills that command headline coverage right from the Lok Sabha stage are typically those that carry ▲ substantial macroeconomic impact, ▲ signal structural shifts in the industrial ecosystem, or ▲ stir intense political and policy debate. The recently passed Banking Laws (Amendment) Bill and Taxation and Other Laws (Amendment) Bill in the Lok Sabha fall precisely into this category. Unified Payments Interface (UPI) has established itself as the core infrastructure of India’s digital payments ecosystem and one of the largest real-time payment networks globally. This statutory revision goes beyond routine administrative maintenance; it modernizes India’s financial governance and addresses the long-term sustainability of its digital payment infrastructure , making it a critical check-item for Korean enterprises operating locally. 1. Departure from the "1949 Framework": What Was Amended and Why? The cornerstone of India’s banking regulatory framework, the Banking Regulation Act, 1949, was enacted in 1949, with key provisions remaining largely unchanged for decades. The current legislative action represents a major financial modernization effort designed to address historical disconnects and align statutory provisions with modern economic realities. ① Legal Framework for Levying UPI Merchant Discount Rate (MDR) Key Amendment: Concurrently amending the Payment and Settlement Systems Act, 2007 , the legislature restructured the previously mandated "Zero-MDR" rule. This grants the Central Government the statutory authority to impose or permit merchant fees on specific payment transactions as necessary. Background: Payment system operators (FinTechs and banks) facing immense transaction volumes without sustainable monetization avenues repeatedly raised operational concerns. This amendment aims to ensure continued investment in infrastructure maintenance and cybersecurity. ♣ [Regulatory Update] UPI MDR Structure Effective October 15, 2026 Following recent announcements by the Government of India and the National Payments Corporation of India (NPCI) , starting October 15, 2026, a 0.4% Merchant Discount Rate (MDR) will apply exclusively to Person-to-Merchant (P2M) transactions exceeding ₹2,000 at large merchant locations. MDR Caps: For high-value transactions of ₹75,000 or above, the fee is capped at a maximum of ₹300 per transaction. Essential sectors such as railways, telecommunications, and fuel stations will be subject to a flat fee of ₹5 per transaction. Exemptions: Consumer-side payment fees, Person-to-Person (P2P) transfers, low-value transactions up to ₹2,000, and small/micro merchants (P2PM) with monthly collections up to ₹100,000 remain under the Zero-MDR regime. ② Realignment of the "Substantial Interest" Threshold Key Amendment: The monetary threshold defining "Substantial Interest"—used to strictly regulate conflict of interest and transactions involving related parties of bank directors—was raised from ₹500,000 to ₹20,000,000 (₹2 Crore; approx. KRW 320 million) . Background & Significance: This update holds deeper implications than a mere numerical adjustment. The previous ₹500,000 limit was fixed in 1968 and remained frozen for nearly six decades, failing to reflect modern corporate capital structures and over-extending conflict-of-interest regulations. The revision allows l ocal subsidiaries to manage director appointments and corporate governance under a far more realistic regulatory benchmark. ③ Expansion of Depositor Protection and Nomination Rights Key Amendment: Revisions allow account holders and safe deposit locker tenants to designate up to four Nominees either simultaneously (with specified proportional shares) or successively, streamlining asset transmission upon death. ④ Governance Reforms for Cooperative Banks Key Amendment: Extended the maximum tenure limit for directors of cooperative banks from 8 years to 10 years, and permitted dual directorships across Central and State Cooperative Banks. 2. Foreseeable Changes and Local Industry Responses For Korean enterprises, this amendment is not merely a central bank policy issue—it directly affects transaction costs, supply chain settlements, subsidiary governance, and corporate contract management. Shifts in B2B Transaction and Supply Chain Settlement Costs: While P2P and micro-transactions remain free, B2B settlements or large-scale retail supply chain transactions exceeding ₹2,000 will require a re-evaluation of settlement costs due to the 0.4% MDR application. Concerns Raised by Trade Associations: While micro and small merchants are protected through thresholds (≤ ₹2,000 and low monthly volume exemptions), retail bodies express concern that establishing statutory grounds for MDR opens the door for future expansions in scope and rates. Debate over Dual Directorships in Cooperative Banks: Opposition members contend that allowing individuals to serve simultaneously on regional and State Cooperative Bank boards risks concentrating decision-making power over rural credit networks within specific political circles, potentially compromising governance independence. 3. Legislative Process and Jurisdiction: Does Implementation Vary by State? Having passed the Lok Sabha , the Bill will proceed through the Rajya Sabha (Upper House) , receive Presidential Assent , and be published in the Official Gazette . A critical legal distinction for Korean enterprises is that, unlike labor or agricultural regulations (which fall under the Concurrent or State Lists), these statutory amendments fall under the Union List (List I, Seventh Schedule of the Constitution) , placing them under the exclusive jurisdiction of the Central Government and the Reserve Bank of India (RBI) . Consequently, state governments—including those governed by opposition parties—cannot enact state-level overrides. Once notified, the law applies uniformly across all States and Union Territories. However, specific implementation guidelines (such as the October 15, 2026 MDR framework) remain subject to technical circulars issued by the RBI and NPCI, requiring ongoing compliance monitoring. 4. Operational Action Plans for Korean Enterprises by Business Model To mitigate operational risk, Korean businesses in India should review their setup according to their business model: E-Commerce / B2C Expected Impact: 0.4% MDR applied to payments exceeding ₹2,000 starting October 15, 2026 (cannot be passed on to retail consumers). Recommended Action: Clarify fee absorption liabilities, review Payment Gateway (PG) merchant contracts, and recalculate unit-level unit economics. Manufacturing / Logistics / B2B Expected Impact: Transaction costs may apply to vendor settlements and transactions between large commercial entities. Recommended Action: Audit current vendor payment channels, evaluate direct bank transfer (NEFT/RTGS/IMPS) alternatives, and review payment terms in commercial agreements. Platforms / FinTech Expected Impact: System logic updates required for settlement engines to support statutory caps (e.g., ₹300 maximum cap logic and flat-fee rules). Recommended Action: Complete updates to accounting and reconciliation engines prior to October 15, 2026, and monitor updated fee structures with acquiring banks/PGs. Korean Parent Companies / Indian Subsidiaries Expected Impact: Increase of the "Substantial Interest" threshold to ₹20 Crore. Recommended Action: Re-evaluate corporate compliance regarding parent company executives holding concurrent directorships or equity interests in Indian entities. Conclusion: Proactive Alignment with Regulatory Trajectory Not every bill passed by the Lok Sabha creates an immediate operational impact, and over-allocating resources to predict unfinalized administrative details is rarely efficient. However, when regulatory authorities consistently signals and legislates toward a specific policy trajectory, proactive alignment becomes essential. While operational circulars may evolve, underlying statutory directions remain firm. These statutory amendments clearly demonstrate two primary objectives: ensuring the financial sustainability of digital payment infrastructure and modernizing financial governance . As key provisions—including the MDR framework on transactions above ₹2,000 effective October 2026—take effect, Korean businesses currently operating in or planning entry into India should preemptively evaluate their cost models and contractual frameworks to safeguard long-term operational stability.