The Reserve Bank of India (RBI) had recently announced the introduction of pre-sanctioned credit line on the Unified Payments Interface (UPI) in order to boost digital transactions in India. This credit line would allow users to borrow money digitally and repay it later, providing them with greater flexibility and convenience. Given the growing appetite for credit among the Indian consumers, for instance at the end of FY23 personal loans by banks stood at INR 40 lakhs, a jump of 20% from FY22, this initiative is expected to extend the reach of credit to a wider consumer base including the underbanked segment and significantly expand the credit market.
UPI transactions in the month of August 2023 crossed 10 billion, with 473 banks currently live on UPI. In a poll survey conducted among attendees from the banking and financial services industry in India, during one of our recent webinar on Credit Line on UPI, 60% of the participants indicated a significant impact of UPI on the credit market. The banks planning for the credit line on UPI product may initially look at their Existing-To-Bank (ETB) customers, and later post learning curve enlarge the net to a larger audience i.e. the New-To-Bank (NTB) customers.
To avail the credit line, users may need to have a good credit history and meet certain eligibility criteria set by the banks. Banks may determine the credit limit based on different criteria including user’s creditworthiness and transaction history. Users can access this credit line through their UPI apps and utilise it for various purposes such as bill payments, online shopping, etc.
One of the key advantages of the credit line on UPI is its seamless integration with the existing UPI infrastructure. Users can continue to make payments using their UPI IDs, and the credit line feature will be seamlessly integrated into the payment flow. This ensures a smooth and hassle-free experience for users.
Further, to a poll question on the impact of Credit line on UPI on competing products, 60% of the audience polled during our webinar indicated BNPL will be impacted, followed by 40% audience saying credit cards will be impacted.
In addition to its integration with UPI, the credit line on UPI may offer competitive interest rates and flexible repayment options. Currently, credit card providers charge 36% and with competitive interest rates for small ticket size loans, the potential for credit market to go on a trajectory is huge, once adoption picks up. Users can choose to repay the borrowed amount in full or in instalments, depending on their financial capabilities. This flexibility makes it easier for users to manage their finances and meet their payment obligations.
Even though the credit line on UPI mandate is for the retail sector, as and when it gets opened for the commercial sector, the credit line on UPI is expected to have a significant impact on the B2B space, particularly the Micro Small and Medium Enterprises (MSMEs). These businesses contribute 30% to the GDP but often face a shortfall in the supply of credit. There are lot of payments today where the credit cards are not able to fulfil the need of the MSMEs. Obviously, there will be competitive overlap between credit cards and credit line on UPI. However, with credit line on UPI, the scope for B2B credit market is bound to expand.
UPI-based lending will make banks and Non-Banking Financial Companies (NBFCs) more efficient, enabling them to provide credit in a quicker and more economical way to borrowers.
Banks and Payment Service Providers (PSPs) are also excited on how Credit line on UPI offers the potential to monetise UPI payments and lower the cost of credit disbursement. In the future with increased adoption, and RBI’s newer guidelines, opportunities may come up to launch newer and more innovative UPI-based revolving credit lines, instant overdraft/EMIs, and personal loan solutions for consumers. Pre-sanctioned working capital and overdraft credit lines from banks would be a great boost to MSMEs’ operational needs. Enabled by UPI, these can be used for business-to-business payments with transaction limits.
As the credit line on UPI market grows and credit line on UPI ecosystem grows to include other players like NBFCs, fintechs, etc., new business models including co-lending can be explored. FinTech companies or UPI payment apps can be leveraged to source customers, facilitate transactions, generate bill payment reminders, and accept repayments. This will increase interoperability in the credit domain, and FinTech companies can leverage UPI-based lending data to come up with improved services for users.
Overall, RBI’s credit line on UPI mandate is a significant step towards promoting digital transactions and financial inclusion in India. It provides users with access to instant credit, enhances their payment experience, and encourages the adoption of digital payment methods. This initiative will not only create a more robust and efficient digital payment ecosystem in the country, but also will be a catalyst in the Indian economy’s growth story.
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