January 30, 2024


Should pre-sanctioned credit lines be allowed on UPI?

It’s become easier than ever to pay for things nowadays. Whether it’s popping over to the corner store, going to a big supermarket, or just a few clicks online, digital transactions have exploded in India over the past several years. The harbinger of all this is the Unified Payment Interface (UPI). It revolutionised digital payments in India. More people are now consumers with ease of payment.

What if the next step in the UPI journey is pre-sanctioned credit lines? You don’t need a credit card, just the UPI, and you don’t need to worry about paying for something immediately. The RBI had the same idea. Last year, it asked banks to begin providing pre-sanctioned credit lines on UPI. However, doesn’t this pose a risk to the banking and fintech ecosystem?


India’s digital lending ecosystem has surged in recent years and propelled the credit market upward and forward. Some estimates state India’s digital lending market could reach $1.3 trillion by 2030 from $270 billion in 2022. It could become 60% of the fintech market. That’s a substantial piece of the broader financial landscape.

What the UPI has done is revolutionary in terms of smoother fund transfers, payments, etc. It has helped the world see India as a global force in fintech. The digital lending aspect of it all is gaining momentum thanks to fintech startups and non-banking financial companies (NBFCs). It began perhaps controversially with the demonetisation policy in 2016.

Amid global economic and geopolitical uncertainties, many see the Indian economy as one of the bright spots. While interest rates have increased globally, the Reserve Bank of India (RBI) has maintained a balanced approach.

Coming to the fintech space, there were a couple of years when things weren’t looking good. Over the past year, companies seem to be upbeat, with some venture-funded startups being profitable and some looking for fresh funding. The rebound from the pandemic has been better than expected. With renewed optimism, companies looked to bring a credit card-like payment experience for consumers on the UPI.

The RBI took notice. Last September, it stated that the UPI system could include pre-sanctioned credit lines issued by banks for transactions. Previously, only the deposited amount could be transacted through the UPI system. Only savings accounts, overdraft accounts, prepaid wallets, and credit cards could be linked with UPI. Last April, the RBI proposed expanding the UPI’s scope to enable the transfer to/from pre-sanctioned credit lines at banks.

Let’s say a customer has a pre-approved credit line of ₹1 lakh, then it can be used as a loan for payments on UPI. The banks will set the terms and conditions of use of such credit lines, including period of credit, rate of interest, and credit limit.

VIEW: Logical evolution for UPI

Ever since the UPI system was launched in 2016, it has accrued over 480 member banks and financial institutions. There should be no doubt about the base the system has forged over the years. 2018 saw new features like linking overdraft facilities to UPI payments. In 2022, RuPay credit cards were allowed. Pre-sanctioned credit lines are the logical next step.

In India, credit cards haven’t exactly penetrated large sections of society. There are only about 100 million in circulation in a country of over a billion. While there has been some growth in credit cards, it’s mostly the same group of well-to-do people who get them. Given India’s economic growth and the burgeoning fintech landscape, the RBI has made the right call. The intent is to reduce the customer acquisition costs for banks. It’s also in line with India’s ambitions of broader financial inclusion.

That broader financial inclusion is why the RBI’s decision is so vital. In China, nearly 40% of those above 15 years of age borrow from formal sources, including credit cards. In India, some estimates say that number is less than 13%. As said earlier, the acquisition costs for banks are high. It’s why more lenders aren’t interested in getting into the space. With the UPI’s architecture and how ubiquitous it has become, things have opened up.

COUNTERVIEW: Not so fast

If you’re a bank, there’s a big worry here – how do you know if modest earners can handle unsecured loans? What if they have a limited credit history? Paytm retreated from the buy-now-pay-later (BNPL) model by slowing third-party bank loans on its online network. The BNPL fintech companies were faced with late or non-payments from customers. This led to higher non-performing assets and financial losses.

The product is bound to take off since there’s a demand for financing options at the point of transaction. However, there’s always the risk of customers being over-leveraged. If every entity is allowed to offer credit through UPI, then there’s overleveraging. It’s because customers will surely go to multiple companies to get credit lines. Things will get chaotic and messy, and the likelihood of customers repaying on time reduces.

Unsecured credit distribution isn’t the challenge, given the demand. It’s the collection of these loans that’s the worry. Sure, fintech companies can help banks in distribution, but the banks have to worry about repayments. Smaller merchants who operate in a zero merchant discount rate (ZMDR) system may be hesitant to accept credit-linked UPI payments. Credit card payments usually have a larger ticket size compared to general UPI payments. The former are made to larger merchants who can accept the merchant discount rate fee.

Reference Links:

  • Credit on UPI kicks off in move to further democratise funding – Forbes India
  • Onwards and upwards: a positive outlook for private credit in India – Ernst & Young
  • RBI allows pre-sanctioned credit lines through UPI – Deccan Herald
  • Decoding the growth of credit market with the evolving digital lending ecosystem in India – The Economic Times
  • India’s lending boom must take the next logical step through UPI – Moneycontrol
  • How UPI can go one up on credit cards, democratize credit in India – The Economic Times
  • Fintechs bet big on credit line on UPI but banks tread with caution – The Economic Times

What is your opinion on this?
(Only subscribers can participate in polls)

a) Pre-sanctioned credit lines should be allowed on UPI.

b) Pre-sanctioned credit lines shouldn’t be allowed on UPI.


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