UPI credit line: As good as it gets for credit on the go

Imagine going around the world carrying just your phone, yet free of worries about paying for the entire trip or food or even shopping. All you need is your UPI-enabled mobile phone that can instantly pay for every pleasure that you can enjoy. What's more, by just adding the latest innovation on the UPI - a pre-approved credit line that works like a credit card or any other credit instrument - you can explore the dream African wilderness or start your venture, worry-less and carefree.

The success of UPI has not only brought a ground-swell to the way we pay and receive money in a swift and efficient manner but also altered the global perceptions about India’s institutionalisation of digital systems to address some of the radical challenges of our population. The UPI platform, introduced soon after the demonetisation, is a significant innovation in the country’s payments landscape, providing a user-friendly, secure, and efficient way of making instant fund transfers.  

The UPI’s technical architecture and key features have made it scalable and reliable, capable of handling large volumes of transactions, swiftly and with ease, creating an immediate affection and addiction among users. As the adoption of digital payments continues to grow in India, the UPI platform is expected to play a critical role in facilitating cashless transactions and driving the country's economic growth. With a progressive banking regulator and a pragmatic government helming the digital agenda forward, the UPI continues to dominate the payments space with its immaculate innovations.  

Though carefully calibrated to the larger purpose, concurrent and trendy features are being added to the UPI to facilitate the diverse payment needs of the economy. For example, 'conversational payments' that guide users to initiate and complete transactions using an AI-powered system and small value digital payments in offline mode, including the National Common Mobility Card (NCMC) and the UPI Lite with an NFC-enabled compatible device, are not just faster or advanced contactless payment modes, these are designed meticulously with a desire to deepen the digital penetration in the country.  

An on-tap credit-line on UPI: One such positive and rather impressive announcement, made on the April 6, 2023, by the RBI Governor, was the collateral-free, pre-sanctioned credit line or borrowing limit that can be availed on the UPI through a user’s bank. In common parlance, a credit line is a flexible, revolving loan from banks, approved for users after due verification – just like a traditional loan, but faster than it. Once the bank approves the pre-decided borrowing limit, like the credit limit in a credit card, the user can easily use the same, as per the individual requirement. The repayment can be done with the due interest at a later day as in case of credit card.  

How to avail a credit line: To avail the same, a customer must apply to the banks which in turn would check the financial details of the borrower such as eligibility, income, credit score and repayment history. One may note that customers will only be charged as per the utilisation of the credit allotted. The convenience is tremendous; you don’t have to postpone emergency payments or last-minute shopping for want of money in your account. Effectively, it works like a credit on tap.

A good initiation for new-to-credit customers: For those who are comfortable handling credit, a credit line added to their UPI app takes away the need to carry multiple credit cards or other credit disbursing instruments. Another benefit is that banks can extend this product to non-customers, using their own UPI interface. However, like all credit instruments, one should be judicious in the purpose, using it in a planned, productive manner with a clear-cut understanding of the repayment terms and conditions.  

For the merchants and MSME/SMEs who already use UPI for paying and receiving money, expanding the businesses becomes much easier, using the collateral-free, on tap credit line. Broadly, this would bridge the gap of as large as Rs 15-20 lakh crore in the MSME/SME credit system, enhancing the overall economic growth in rural and semi-urban areas. Thus, the latest innovation can bring more customers into credit inclusion bracket as part of the greater financial inclusion mandate.  

The initiative is certain to ignite more innovations around UPI such as revolving credit lines, instant overdraft, and other personal credit solutions. For businesses, pre-approved working capital will boost their B2B transactions. Besides, this is also seen a pre-cursor to the wider introduction of BNPL (Buy Now, Pay Later) products.  

Meanwhile, one can expect the regulator to build more customer protection measures into the whole gamut of digital lending guidelines such as greater disclosures and data privacy measures and hopes that this ground-breaking step will ignite more innovative products for the end consumer.  

(The author is Group President and Head, Consumer Banking, Kotak Mahindra Bank)