The Reserve Bank of India (RBI), which oversees the Indian Rupee, monetary policy, and the banking system, has proposed to expand the scope of the United Payments Interface (UPI) by allowing banks to operate pre-sanctioned credit lines through UPI.
Governor Shaktikanta Das made this announcement during the bi-monthly monetary policy, stating that this move would encourage innovation and broaden the reach of UPI.
This development implies that borrowers can now obtain digital credit lines from banks through UPI.
Expanded UPI Scope & Presanctioned Credit Lines
Shivaji Thapliyal, Head of Research and Lead Analyst at YES Securities, explains that with the proposal to allow pre-sanctioned credit lines via UPI, banks will now be able to provide credit products similar to credit cards without the need for issuing a physical card or requiring expensive infrastructure like POS/swipe machines.
According to Shivaji Thapliyal, Head of Research and Lead Analyst at YES Securities, although credit cards were allowed on UPI rails earlier, it was limited to the RuPay settlement system which is not popular among private sector banks.
Since most credit cards issued by private sector banks are on the Visa and Mastercard settlement systems, the allowance of RuPay credit cards did not have a significant impact on these banks.
According to Shivaji Thapliyal, Head of Research and Lead Analyst at YES Securities, private sector banks can now offer credit card-like products through UPI to anyone who has a UPI relationship with the bank and at any merchant that has a lightweight and
low-cost QR code or other acceptance infrastructure, as pre-sanctioned credit lines are now proposed to be allowed.
This will enable them to mimic credit card offerings from a credit perspective without the need for a physical credit card or expensive acceptance infrastructure such as POS/swipe machines.
Now that we have touched upon the concept of pre-sanctioned credit lines, let’s delve deeper into what it means.
Essentially, pre-sanctioned credit lines refer to pre-approved credit that banks would offer to their customers based on data analytics carried out on their internal deposit customers.
Private sector banks will target both existing internal liability customers and new-to-bank customers for the pre-sanctioned credit lines.
This would include not only those who have an existing relationship with the bank, but also non-customers whose credit bureau and other information have been analyzed by the bank.
The term “new-to-bank customers” refers to individuals who are using a specific bank’s app as a means to conduct UPI transactions from a deposit account with another bank.
How Will It Benefit the Customers?
This initiative would minimize the need for customers to carry multiple cards and facilitate transactions through UPI.
Rajsri Rengan, India’s Head of Development, Banking and Payments at FIS, stated that this move will lead to a significant reduction in the time and effort required for customers to obtain loans, which will ultimately drive economic growth and development.
Harish Prasad, the Head of Banking in India at FIS, suggested that the provision of pre-sanctioned credit lines through UPI would also revive the digital lending and Buy Now Pay Later (BNPL) sectors.
Previously, restrictions on disbursements into prepaid wallets and cards were imposed through credit lines and loans.
Several buy now, pay later (BNPL) providers had to adopt temporary solutions to maintain a smooth purchasing process due to the limitations on disbursements into prepaid wallets and cards.
According to Prasad, the opening up of the UPI channel for access to credit lines means that the point-of-purchase credit experience can become seamless, allowing for credit to be used across a much larger merchant base.
This has the potential to drive transformational growth for the BNPL lending sector, he added.
According to the National Payments Corporation of India (NPCI), the transactions carried out on the UPI platform increased by 60 percent YoY in March, reaching a new record of 8.7 billion.
Additionally, in terms of value, the payments made through the platform saw a 46 percent YoY growth, amounting to Rs 14.05 trillion.
