UPI Credit Line To Be Available In Small Finance Banks: RBI MPC

The Reserve Bank of India (RBI), on the concluding day of the monetary policy committee (MPC) on December 6, 2024, announced to extension of the Pre-Sanctioned Credit Lines through UPI facility at the small finance banks (SFBc). Governor Shaktikanta Das said in his statement,“SFBs leverage a high-tech, low-cost model to reach the last mile customer and can play an enabling role in expanding the reach of credit on UPI. It is, therefore, proposed to permit SFBs to extend pre-sanctioned credit lines through the UPI. Necessary guidelines will be issued shortly”.

Also Read: RBI MPC Meeting 2024: Repo Rate Unchanged At 6.5%, Policy Stance Neutral  

What Is A Credit Line?

A credit line or a line of credit is an unsecured loan authorised banks offer to customers with good credit history. It allows them to borrow money up to a predetermined limit. A user can take the facility, use the funds when needed, and pay it back when the need is fulfilled. Notably, the interest is levied only on the money withdrawn from the credit line and for the specific period until it is paid back. So there is no need to pay interest until one withdraws the money. When another need arises, the user can again borrow money from a credit line without needing to perform formalities as in the case of a typical unsecured loan.

Pre-Sanctioned Credit Lines Through UPI:

‘Pre-sanctioned Credit Lines on UPI’ is a financial service aimed to make credit access easy for customers. Under this, individual customers and small businesses can obtain a pre-sanctioned credit line from their banks and use it any time later as per their requirement for UPI transactions.

According to NPCI, “It facilitates availability and frictionless usage of credit lines, overdrafts, and retail loans, fostering economic growth and enhancing financial inclusion.”

Also Read: RBI Enhances UPI Lite Transaction Limits: Rs 1,000 Per Transaction And Rs 5,000 Per Day 

Background:

The credit line on UPI was launched in September 2023, but until now it was available only with the scheduled commercial banks (SCBs).

Das said in his statement, “In September 2023, the scope of Unified Payments Interface (UPI) was expanded by enabling pre-sanctioned credit lines to be linked through UPI and used as a funding account by Scheduled Commercial Banks excluding Payments Banks, Small Finance Banks (SFBs) and Regional Rural Banks.”

However, now, it has been extended to SFBs to provide this facility to their customers.

Also Read: Inoperative Bank Accounts On The Rise Due To Non-Updated KYC; RBI Urges Banks To Make The KYC Process Hassle-Free  

How Will It Impact?

The extension of the Credit Line on UPI is aimed to increase credit access to more people. As Das said, “Credit line on UPI has the potential to make available low-ticket, low-tenor products to ‘new-to-credit’ customers.”

On the SFB inclusion in the Pre-sanctioned Credit Lines through UPI, Mohit Bedi, Co-Founder and CBO, opines, “This is great news for Small Finance Banks (SFBs)! Credit on UPI opens up a new business avenue for SFBs, which didn’t previously exist. Many SFBs, like AU Bank, have already found success entering the credit space through credit cards. With credit lines on UPI, SFBs can now offer low-cost credit solutions, both in terms of operations and customer acquisition, leveraging their extensive merchant networks in focused locations. This also provides an excellent opportunity to onboard new-to-bank (NTB) customers. It's a match made in heaven".

Vivek Iyer, Partner, Grant Thornton Bharat says, "RBI continues to keep the consumer interest in mind, which is usually bettered through more competition amongst the market players. Allowing Small Finance Banks to participate in the credit line in UPI arrangement is a step in the right direction ensuring not only better competition but also better financial inclusion". 

Eventually, linking this facility with UPI has already made it more accessible for potential borrowers and now with the inclusion of SFBs, the reach is expected to become even wider.