From the time UPI was introduced in the Indian economy, it has revolutionized the digital payments segment and modified the payment behavior of an average Indian. The volume of transactions carried out through UPI has been increasing on a daily basis and the world is amazed at the pace of growth of Digital India. To add another feather to UPI’s cap, the RBI Governor announced on 6th April 2023 that UPI users will now be able to avail pre-sanctioned credit lines through banks.
Here’s what you should know about Pre-sanctioned credit on UPI and how it will work.
What is a Credit Line?
Let us begin by understanding the meaning of credit lines. It is a lending facility similar to a loan availed from a bank. The main difference however is that it is more flexible and revolving in nature. This means that the users get a predetermined borrowing limit similar to one in credit cards. The banks offering the credit lines will have to complete basic verification of the personal accounts which will help them to determine the pre-sanctioned credit limit that can be availed by such accounts.
Credit lines are more convenient as compared to traditional loans as they offer faster processing of the application as compared to traditional loans. However, the interest rates on the credit line are on the higher side. There are different modes of credit lines that can be availed by users like credit cards, small credit lines, business credit lines, etc.
What is the RBI announcement on pre-sanctioned credit lines?
RBI Governor Mr. Shaktikanta Das on 6th April 2023 announced that UPI will now feature the availability of pre-sanctioned credit lines for its users. This move will enable enhanced innovation through UPI and provide the benefit of timely credit to the last mile. UPI has been instrumental in pushing India toward a digital economy and the increasing use of UPI in daily transactions is a testament to its success. Through this addition, the government will achieve a step further in ensuring financial inclusion at the grassroots level.
How will it benefit users?
The government has launched many schemes and programs to date to ensure that microcredit is made available to every citizen in the country and thereby including them in the credit system at the macro level. Earlier, RBI had announced the linking of RuPay credit cards through the UPI system. However, this did not gain much traction from the private bank sector that relied majorly on credit cards by VISA and Mastercard.
To bridge this gap, the government has announced the inclusion of pre-sanctioned credit lines. This will enable the private sector banks as well to offer products similar to credit cards to all the customers that have a UPI relationship with the bank. This will also include customers who may not have an account with the bank but use a particular bank’s UPI app as an interface to carry out UPI transactions through a linked deposit account belonging to another bank. Such credit lines can also be offered (similar to credit cards) to New-To-Bank customers or potential customers whose financial details have been accessed by the bank through credit information agencies.
Through this move, UPI users will essentially be freed from the burden of carrying multiple credit cards. At the same time, this move is expected to revitalise the digital lending space, and the BNPL format which still has a long way to go in the Indian markets.
How will a credit line through UPI work?
To avail this benefit of a pre-sanctioned credit line through UPI, the users will have to make a formal application to the lender or the bank, similar to availing a traditional loan from the lenders. Post the application, the financial records of the applicant will be thoroughly verified by the lender to determine the amount of credit line that can be granted as a pre-sanctioned limit. Lender’s will verify details like the applicant’s credit score, income history, borrowing history, repayment history, etc. This process is similar to that of verification for a traditional loan application. After due verification of the said details, users will be granted the pre-sanctioned credit line based on their personal financial details. This credit line can then be availed and used by the users for their financial transactions through UPI.
As per an estimate, approximately 75% of the retail digital transactions in the country are carried out through UPI. Given the robust UPI structure and its increasing acceptance, this number is only set to increase further. The purpose of introducing the pre-sanctioned credit lines through UPI is to reach the last mile in the digital banking ecosystem and provide the benefit of timely credit to the end consumer in the remotest part of the country. This move will also help the payments industry to create safer channels and more innovative products for the end users enabling the ultimate goal of financial inclusion.
NPCI had recently announced charging an interchange fee of 1.1% on merchants receiving payments over Rs. 2,000 on PPIs. This charge is applicable to the user who has the wallet of one company and making payment to a receiver having the wallet of another company. However, there is no mention of charges on the pre-sanctioned credit line through UPI in the statement made by RBI.
Different types of credit lines available to users include credit cards, small credit lines, business credit lines, etc.
Through the use of UPI enables pre-sanctioned credit lines, banks, and lenders will be able to offer innovative products to the end users thereby addressing their need for credit more efficiently. Moreover, this will reduce the overall costs for the banks and lenders in issuing physical credit cards, providing physical acceptance infrastructure like the POS machines or Swipe machines.
The announcement for a pre-sanctioned credit line through UPI was made on 6th April 2023 by the RBI Governer in the bi-monthly Monetary Policy Committee Meeting.