MUMBAI: Banks will bear part of the subsidy on debit cards announced by the government last week . The government has decided to cap the fees banks receive on debit cards to 0.40 per cent on transactions below Rs 2,000 as against 0.90 per cent announced by the RBI . This cap will apply for the first quarter of 2018.The government on Thursday notified that it will subsidise the merchant discount rate (MDR) levied on shopkeepers by banks on debit card charges on transactions less than or equal to Rs 2,000. “The MDR on such transactions will effectively become zero for the merchant and hence they will become at par with cash transactions,” the notification said.As part of the deal for subsidising MDR, merchants have to sign an agreement stating that there will not be any additional charge for debit card/BHIM UPI or Aadhaar Pay transactions. Also, banks have been told not to have a ‘bundled’ charge for debit cards and credit cards.In the gazette notification, the finance ministry explained the lowering of fees for banks, stating that the same was recommended by a panel looking into reimbursement of MDR. The issue on who will bear the charges on debit card transactions has seen several twists and turns. While the government had announced a complete waiver during demonetisation, the RBI subsequently introduced a system where the charges were lower for low-value transactions.Following opposition from banks, this was replaced with a system where merchants with turnover of over Rs 20 lakh a year would pay 0.9 per cent and smaller merchants would pay 0.4 per cent. Even as merchants were opposing this saying that 0.9 per cent was too high, the government stepped in and said that it would bear all MDR on debit cards for two years.Since most of the debit transactions are below Rs 2,000, banks will end up receiving only 0.4 per cent MDR on most debit card transactions. However, on transactions above Rs 2,000, MDR would be applicable on the full transaction value.