Upi: RBI allows banks to offer pre-approved credit on UPI

MUMBAI: In a move that will expand the consumer credit market in India, the RBI has permitted banks to transfer pre-sanctioned credit lines through the UPI network. The measure will enable UPI services to mimic credit cards and provide low-value credit to nearly 30 crore users of the payment platform.
The RBI has already allowed banks to provide overdrafts to customers, which they can access through UPI. The permission now to transfer funds from a credit line would enable banks to structure the loans like credit cards.

Announcing the move, RBI governor Shaktikanta Das said that the UPI is a robust platform which handles 75% of retail digital payments in India. “RuPay credit cards were permitted to be linked to UPI. At present, UPI transactions are enabled between deposit accounts at banks, sometimes intermediated by prepaid instruments, including wallets. It is now proposed to expand the scope of UPI by enabling transfer to/from pre-sanctioned credit lines at banks,” said Das.
Bankers said that the success of the new product would depend on whether new rules allow banks to structure short-term loans similar to a credit card by providing interest-free credit for 30 days and reward points for transactions as these are the most attractive features in credit cards for customers. However, credit cards can provide these features as they charge a fee to the merchant.
UPI’s advantage over credit cards is that banks do not have to sign up new users as they can provide credit to existing customers. Banks also do not have to incur expenditures in issuing cards, signing up merchants or deploying swipe machines.
Private lenders like HDFC Bank, which saw little value in pushing UPI transactions, could get more active as they now have an opportunity to grow their loan books. Experts say that since the UPI is a public infrastructure, the central bank is likely to open up the platform to non-banks to provide credit in future.
“Allowing UPI for pre-sanctioned bank credit lines will expand footprint and further encourage innovation,” said Indian Bank MD & CEO S L Jain. NBFCs say that business expansion to the new-to-credit market can happen only if non-banks participate. They point out that banks are already allowed to provide overdrafts using UPI while NBFCs’ efforts to provide digital credit have faced restrictions.