Pre-approved credit line on UPI: Democratising credit

Article by Sajish Pillai, Managing Director, Assets and Strategic Alliances, Consumer Banking Group at DBS Bank India

The Unified Payments Interface (UPI) is now seen as the gold standard in innovation, one that can supercharge financial inclusion. Enabling instant and seamless transactions across multiple bank accounts and payment platforms using a single identifier has been nothing short of a miracle. In April 2023, UPI achieved an all-time high with 889 crore transactions, totalling ₹14.07 lakh crore. This growth has expanded beyond domestic boundaries, facilitating cross-border remittances between India and Singapore.

One of the most promising opportunities that UPI offers is access to credit. Credit is vital for economic growth and social development, enabling people to invest in their businesses, education, health, and other needs. However, access to credit remains a challenge for many Indians, especially those who lack formal income proof, credit history, or collateral. According to the World Bank, only 10% of Indian adults have access to formal credit, while 47% rely on informal sources such as moneylenders or friends and family. The penetration of credit payment instruments like credit cards in India is still very low – in single digits – compared to other, more mature markets.

Therefore, the banking regulator’s proposal to expand the scope of UPI by permitting pre-sanctioned credit lines through UPI is a very significant move and is expected to democratise access to a key financial resource: credit. By providing a rich and reliable data trail of transactions, UPI can enable lenders to assess the creditworthiness of potential borrowers based on their income, spending patterns, and repayment behaviour. The widespread use of QR codes can allow borrowers to access credit via UPI very easily and securely, eliminating the need for branch visits or lengthy application procedures. UPI can thus enable last-mile credit access and make it more affordable, convenient, and transparent.

The introduction of a bank-approved credit line through UPI for merchant payments via QR codes has the potential to disrupt the credit card industry. By leveraging the cost-effectiveness and robustness of UPI infrastructure, banks can provide small credit limits to underserved segments without worrying about high distribution and operating costs. On the user’s end, it is a seamless experience to make physical purchases without a card or POS machine in sight or even to make digital purchases with borrowed funds by leveraging their credit lines on UPI.

The UPI credit initiative will serve as a powerful antidote to the challenges encountered by digital lending models, such as buy now, pay later (BNPL) products. The BNPL model suffered from several anomalies due to the absence of effective checks and balances. In contrast, credit lines on UPI will enable regulators to exert greater control over the entire lending ecosystem through stringent guidelines and predetermined limits. These pre-approved credit lines will empower lenders to offer customers instant, collateral-free loans through a user-friendly and secure interface. Customers stand to benefit by gaining access not only to credit but also to an array of integrated financial products and services available via UPI.

Going ahead, this feature will unlock novel opportunities for businesses to devise innovative, customer-centric solutions. Other key innovations that could soon become a reality include:

• Personal finance applications that offer credit lines, spending trackers, and saving tips
• Loyalty programs that incentivise credit usage for specific purchases by providing rewards.
• Social commerce platforms facilitating buying and selling through credit transactions.
• Micro-lending platforms that match borrowers and lenders, utilising credit as collateral.

However, numerous challenges exist, such as customers’ understanding of credit lines and interest rates, access to banks, evolving digital lending guidelines and irresponsible borrowing behaviours. As we move forward, it is imperative to address the roadblocks by focusing on financial literacy, strengthening payments infrastructure and promoting responsible borrowing practices. By fostering a holistic approach that encompasses education, access, and accountability, we can further empower individuals and businesses to make informed financial decisions and contribute to the sustainable growth of the nation. In doing so, we could see UPI ushering in an exciting new chapter with scalability that has the potential to unlock new opportunities with profound implications for financial inclusion and credit accessibility in India.

The advent of pre-approved credit lines is a ground-breaking initiative built upon the pillars of convenience, reliability, and inclusivity. Enabling individuals to harness the power of credit for personal and economic advancement helps them reimagine consumption and transform their lives. With UPI leading the charge, we embark upon a journey of financial empowerment, where the aspirations of individuals converge with the possibilities offered by an inclusive and robust credit ecosystem.

As featured in Times of India