In a groundbreaking development aimed at improving financial inclusion, the Reserve Bank of India (RBI) has proposed allowing small finance banks (SFBs) to extend pre-sanctioned credit lines through the Unified Payments Interface (UPI). This initiative is expected to enhance credit accessibility for a larger segment of the population, especially targeting new-to-credit customers who have limited or no access to traditional banking credit.

Expanding the Scope of UPI for Credit Access

The UPI system, which was developed by the National Payments Corporation of India (NPCI), has already revolutionized the way financial transactions are conducted in India. It enables instant, real-time payments through mobile phones, making it a convenient and efficient payment system for millions of users. In September 2023, the scope of UPI was expanded to include the linking of pre-sanctioned credit lines, allowing commercial banks to use UPI as a funding account, with the exception of Payments Banks, Small Finance Banks, and Regional Rural Banks.

However, the latest proposal seeks to enable small finance banks (SFBs) to offer pre-sanctioned credit lines through UPI, leveraging their low-cost, high-tech business models. This move is expected to enhance the reach of credit services to areas where traditional banking infrastructure may not be as readily available. Small finance banks, known for their ability to cater to underbanked and underserved segments, can now play a significant role in expanding the availability of micro-credit via UPI.

Providing Access to Low-Ticket, Low-Tenor Credit Products

RBI Governor Shaktikanta Das highlighted that offering pre-sanctioned credit lines through UPI could provide access to low-ticket, low-tenor products. These products are particularly beneficial for new-to-credit customers, who are often excluded from traditional credit facilities due to lack of credit history. The idea is to make small, short-term loans available instantly, allowing customers to use their UPI accounts to access quick credit for various needs.

This initiative is expected to empower millions of Indians, especially those in rural and semi-urban areas, with the ability to access instant credit directly through their mobile phones. By using the UPI system, customers will not have to visit banks or fill out lengthy paperwork, which will significantly reduce the barriers to accessing credit.

A Step Towards Greater Financial Inclusion

Small finance banks are uniquely positioned to support this shift due to their business models that focus on reaching last-mile customers. By allowing SFBs to extend pre-sanctioned credit lines through UPI, the RBI aims to bridge the credit gap that exists between traditional banks and underserved communities. This will also pave the way for greater digital financial inclusion by leveraging UPI’s wide penetration.

The RBI Governor also noted that the central bank’s efforts to expand public awareness through new-age communication channels, including social media and the upcoming launch of podcasts, will further increase transparency and the dissemination of important information. This is in line with the RBI's broader initiative to ensure that its decisions reach a wider audience and have a greater impact.

Future Guidelines and Implementation

The RBI has stated that necessary guidelines will be issued in the coming months to facilitate the implementation of the pre-sanctioned credit lines through UPI by small finance banks. Once the guidelines are in place, it is expected that small finance banks will start offering these services to customers, providing a seamless and instant credit experience.

This development aligns with the RBI's broader vision to modernize the Indian banking system and enhance financial accessibility for all Indians, particularly those who are excluded from the formal banking sector.

Conclusion

The proposal to allow small finance banks to extend pre-sanctioned credit lines via UPI marks a significant step towards financial inclusion in India. By leveraging UPI’s widespread reach and small finance banks’ low-cost, high-tech operations, this move will improve credit access for new-to-credit customers, offering them low-ticket, low-tenor loans at the touch of a button.

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