In a significant step towards enhancing financial inclusion and broadening access to formal credit, the Reserve Bank of India (RBI) has granted permission for small finance banks (SFBs) to offer pre-sanctioned credit lines via the Unified Payments Interface (UPI). This move marks a pivotal expansion of the credit ecosystem in India, which previously saw this facility exclusively available through scheduled commercial banks. The integration of pre-sanctioned credit lines with UPI facilitates seamless access to overdrafts, retail loans, and credit lines for users, which is expected to foster increased economic activity and contribute to the growth of India’s financial landscape.

Expanding Credit Access to Underserved Customers

The new provision allows small finance banks to leverage their cost-effective, technology-driven operations to provide credit facilities to individuals and small businesses that were traditionally underserved by the banking sector. By linking pre-sanctioned credit to UPI, SFBs can now extend these services to “new-to-credit” customers, including individuals and small-scale entrepreneurs, furthering the RBI’s mission to ensure access to credit for all segments of society. The UPI platform will thus serve as a gateway for consumers and businesses to obtain easy and efficient credit products while fostering broader economic growth.

Credit Line Transactions via UPI: A Game Changer

While UPI transactions in general have seen a decline of 7% in volume and 8% in value in November 2023, compared to the all-time highs in October, the new credit line feature via UPI has gained momentum. Credit line transactions on UPI now contribute approximately Rs. 100-200 crore (US$ 11.81–23.62 million) each month, making up a portion of the Rs. 10,000 crore (US$ 1.18 billion) total in credit transactions via UPI. The rest of the credit transactions continue to be dominated by RuPay credit cards on UPI. This steady growth indicates the growing popularity and demand for low-ticket, short-tenure credit products, which are perfectly suited for the credit line on UPI model.

The RBI’s approval for small finance banks to issue pre-sanctioned credit lines on UPI is a part of its broader effort to expand access to financial services across India. The growth potential of this facility is immense, as it offers a way for SFBs to cater to the underserved and unbanked population, many of whom have previously faced challenges in accessing formal credit. By enabling this technology-driven solution, the RBI expects to accelerate the adoption of digital financial products and services, helping more people and businesses integrate into the formal economy.

Promoting Economic Growth and Financial Inclusion

The introduction of credit lines on UPI is a game-changing initiative that can significantly boost financial inclusion in India. It aligns with the government's goals of promoting a cashless economy and supporting small businesses by offering quick, easy access to credit. The impact of this initiative extends beyond just individual customers, as small businesses can now access working capital and loan products via UPI to fuel their operations and growth.

Additionally, the low-cost and easy accessibility of these credit products are likely to play a key role in driving entrepreneurship and economic activity, especially in rural areas and smaller cities, where traditional banking services are limited. This also ensures that credit facilities are more easily available to those in need, enhancing the overall credit culture in the country.

Looking Ahead: The Future of UPI-Linked Credit Products

The credit line via UPI is only the beginning of a larger shift in how credit is accessed and used in India. With the increasing penetration of smartphones and internet connectivity, this system of UPI-linked credit products is expected to grow exponentially, with a focus on low-cost, high-accessibility loans. It is anticipated that this facility will support further economic activities, especially in sectors that are traditionally underbanked, including agriculture, small manufacturing, and services.

The RBI’s endorsement of small finance banks in this endeavor showcases its commitment to promoting financial innovation and inclusive growth. As India continues to develop its digital financial infrastructure, UPI remains a pivotal tool in revolutionizing the financial sector and ensuring that credit facilities are accessible to all.

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