UPI’s Credit Revolution: How Pre-Sanctioned Credit Lines Can Change Digital Payments

Reserve Bank of India (RBI) moved in to transform the country's digital payments sector. It made a policy change by expanding the application of the Unified Payments Interface (UPI) to allow transactions with banks' pre-sanctioned credit lines. It will make more credit available, change consumers' behaviour to consume credit, and will have implications for India's digital lending industry.

What Has Changed?

UPI has so far only allowed payment from overdraft accounts, prepaid wallets, savings accounts, and credit cards. With the new policy, users will also be allowed to pay out of a pre-approved credit line taken from their bank. It essentially means that the users will be able to borrow short-term funds directly from their UPI-related bank accounts without either a credit card or applying for a direct loan. Banks may set their own conditions and terms for such lines of credit, such as interest rate, repayment period, and spending limit, according to the RBI circular of February 12, 2025. Advance approval from customers, however, is required for this facility.

How Will This Affect Consumers?

The use of pre-approved lines of credit coupled with UPI can make lending short-term easy and convenient. Here's why:

1. Instant Credit Facility: Pre-sanctioned credit facilities will be with the customers immediately, unlike traditional document loans and sanctioning. It will prove to be convenient for sudden money needs due to some unexpected situation, foreign trip, or some miscellaneous spending.

2. No Credit Cards: Indian consumers don't like to pay using credit cards due to interest and additional charges. Due to UPI-based credit, now they would not even need to hold a credit card in their hand to get a small loan.

3. Improved Borrowing Management: Since the credit limit and lending term are determined by banks, the borrower would then have an adequate framework of short-term credit management without getting trapped in debt.

4. Gliding Payments: Consumers are able to use their credit line as a payment instrument while making payments via UPI, i.e., switching wallets and accounts.

Impact on Banks and Fintechs

The banks will have the controls regarding the structuring of this new credit paradigm. Since they have the autonomy to design their own credit limit system, rates of interest, and the parameters for eligibility, there can be competition amongst institutions which would extend more amenable terms of lending to the consumers.

Fintechs and online lenders also have much to benefit from this shift. The majority of fintechs already offer credit-linked UPI products with the help of banking partnerships. Other digital lending platforms can offer pre-sanctioned lines of credit for their UPI products with RBI sanction. Banks and fintechs will, however, need to ascertain the credit risk of extending such credit. Ease of access can lead to higher defaults if lenders are not held back from lending.

Potential Risks and Challenges

While the step opens up more access to digital credit, it also trails some challenges with it:

1. Overspending Risk: Easy availability of credit repeatedly can result in overspending by the users, leading to debt for the customers who will not have the willpower to repay on time.

2. Poverty Defaults: With credit cards, during a credit check by banks, such lines of credit can be extended on the basis of previous transactions, and this might result in higher defaults.

3. Regulatory Oversight: RBI can be compelled to regulate how the banks structure such credit lines in order to prevent predatory lending and guard consumers.

Will This Change India's Digital Payment Space?

Having pre-sanctioned lines of credit in UPI can be a game-changer for India's digital economy. Filling the gap between periodic payments and transient credit needs, the system can make more individuals use digital transactions.

To business firms, and especially to small and medium enterprise (SME) firms, this institution will facilitate the demand for working capital by providing easily accessible credit for business expenditure. To consumers, in their own turn, comes the advantage of a more casual mechanism of covering consumption without incurring costly loans.

According to Vivek Iyer, partner and financial advisor at Grant Thornton Bharat, "Access to credit is one of the most important elements a financial services ecosystem can offer to individuals. UPI has been a significant game changer from a customer convenience standpoint for payments and using the same platform to provide credit lines, enables the RBI to get multiple customers to access credit with ease. Not only that but the added benefit of credit history available from the detailed transaction payment history serves as a good data point for sound underwriting decisions. Given this background, we see both the demand and supply of credit increasing amongst all borrowers including first-time borrowers".

What's Next

As banks begin rolling out this feature, its adoption and impact will depend on how well financial institutions educate customers about responsible borrowing. If implemented effectively, this could further accelerate India’s transition into a credit-inclusive digital economy. For now, RBI’s move signals a shift towards making credit more accessible and convenient, reinforcing UPI’s role as India’s leading digital payment platform.