Summary of this article
UPI credit lines offer pre-approved digital borrowing access.
Works like short-term loans, not merchant-linked BNPL.
RBI aims to formalise small-ticket credit via UPI.
Unified Payments Interface (UPI) has been at the centre of India’s digital payment network since its introduction in 2016. It made another stride in October 2023 when the Reserve Bank of India (RBI) allowed banks to extend pre-approved credit lines through UPI.
Thus, users can make payments from borrowed money using their UPI apps and not from bank account balances. This initiative aims to bring more short-term digital credits under the regulated banking umbrella and increase reach among those who do not have credit cards.
What is a UPI Credit Line
A UPI credit line is a pre-approved line of credit extended by banks to their eligible customers. This functions as a sanctioned limit where users can withdraw money as and when required. The amount is linked with the customer's UPI ID, giving direct access to digital transactions.
Unlike term loans, the borrower does not necessarily withdraw the full amount in one go. Interest is payable only on the extent of money used.
Repayment And Interest Terms
Repayment terms differ from bank to bank. The amount used by the borrowers can be returned in one go during the billing cycle or be converted into instalments. Although some banks give interest-free credit periods, some may consider the outstanding balance as an overdraft and charge daily interest on the borrowed amount.
In case a customer has a pre-approved limit of Rs 50,000 and spends Rs 5,000, interest is levied only on that Rs 5,000. Repayments can be done directly through the UPI app, just like paying the credit card bill.
Transactions under this facility are reported to credit bureaus. Regular payback can build a better credit history, while delays or defaults reduce credit scores.
Is It Considered A Loan
A UPI credit line is a type of loan. It establishes a borrowing relationship between the bank and the customer, and is subject to rules similar to those governing other forms of lending. Though it is accessed through UPI, it is considered a regular credit product that is repayable, and all reporting requirements are like that on any other loan.
The major benefit of this is flexibility: the limit is pre-sanctioned, users have immediate access to funds without needing to apply for a loan afresh each time. Besides, it is an ideal product to handle short-term or emergency expenses within the ambit of the formal financial system.
Difference Between UPI Credit Lines And BNPL
Buy Now Pay Later (BNPL) products also allow users to defer payments, but they work in a different way. BNPL is usually linked to certain merchants or purchases and is broadly provided by fintech companies or non-banking partners. In many cases, it allows customers to split their bills into instalments with less, or minimal, credit checks.
In direct contrast, a UPI credit line is issued by a regulated bank and can be used across any merchant or platform that supports UPI. The facility of UPI credit stands on a revolving basis; that is, once the availed amount is returned, the limit goes back to its original level. BNPL works on a per-transaction basis and has fixed repayment timelines.
Another difference lies in regulatory treatment: while UPI credit lies completely within the banking system, BNPL usually involves partnerships between banks and non-bank entities.
Policy Context
The introduction of credit lines on UPI is aligned with the broader effort of RBI to promote digital credit under formal supervision. The central bank, by linking short-term borrowing directly with UPI, aims to reduce dependence on informal credit and ensure more transparency in small-value lending. This facility works out for those users who do not have credit cards, but wish to have flexible borrowings against regular expenses.
However, this loan product also requires responsible repayment, like in all other cases. Failure to repay dues in time may result in interest accumulation and a poor credit record.
