How the New Pre-Sanctioned Bank Credit Lines Through UPI Will Work

By Sankhadeep Chakraborty . October 03, 2023 . Blogs

In August 2023, we witnessed a landmark achievement in India’s financial prowess. The country’s homegrown UPI payment infrastructure recorded over 10 billion transactions in a single month. As UPI continues to be the flag bearer of innovation in India’s fintech landscape, the Reserve Bank of India has just announced a new addition that broadens the spectrum of consumer services in the already bustling UPI ecosystem. 

The latest announcement that came on the 4th of September was regarding the inclusion of pre-approved credit lines from banks as a transactional money source.


Isn’t It the Same as Credit-Card-Linked UPI Transactions?

The answer is no. Credit card is just one of the several pre-approved credit-line options that banks offer. Presently, UPI transactions are permitted on the actual amount in the sender’s bank account or overdraft account, wallets, and credit cards. With the new announcement, RBI has allowed banks to build a new credit facility that works similar to a loan but is available instantly to consumers for use in their UPI payments.


How Will It Work?

As per details from the RBI announcement, banks and financial institutions will be permitted to create a new type of funding account with consent from the consumer. This account will be available as a source option in the customer’s UPI app, and they can select it as with any other linked bank account. However, since this is a credit line, banks are given the autonomy to decide on the terms of the credit.

Upon the discretion of their boards and policies, banks are free to draft a new governance framework for such UPI credit lines. They can decide on the credit limits available to each customer, the prepayment terms, the rate of interest, the period of credit, and similar aspects. The only mandate they must adhere to is that their account holders must consent to avail of such a credit line after being shown the terms and conditions.


Why Is This Announcement a Breakthrough?

With banks being permitted to offer credit lines via the UPI system, India’s financial empowerment goals are being transitioned to a whole new level. Banks have constantly been blamed for being unable to penetrate deep into consumer markets and bring the less-privileged folks into the full spectrum of banking services. 

Without access to credit facilities from scheduled banks, many consumers rely on private financial institutions and lenders. These entities often operate illegally and extort huge sums in the name of interest, leading to severe hardships for consumers.

Loans needed by such consumers may not present a significant business opportunity for banks to make an effort to offer them high-risk personal loans. Several such customers may not have valid credit histories for banks to assess in their usual loan sanction workflow. In most cases, consumers face rejection due to these conditions.

With the new UPI-linked credit line facility, both banks and customers are given a golden opportunity to build a last-mile credit system that serves everyone in the social spectrum. It offers a convenient, transparent, and super-fast facility that brings ready cash to consumers for their smaller needs.

Banks can leverage the customer’s UPI transaction history as a perfect credit assessment tool and gauge their spending habits, money flow, and past repayment behavior. With advanced analytics and reporting technology, banks can easily build a pool of credit-worthy individuals to whom a decent credit line can be offered.

There are a range of activities involved in the credit line workflow. It ranges from assessing individuals, determining limits, building personalized interest credentials, sanctioning, and using credit for purchases, repayments, and settlement of disputes, if any. 

The beauty of UPI-linked credit lines is that all these activities can be managed from any UPI app without the need for any physical interaction between banks and customers. This is a major step in enabling a decent credit facility for consumers who have been historically denied access to mainstream financial empowerment by banks, as explained earlier.


The Perfect Festive Gift

The announcement from RBI has come right at the time when India is gearing up for its festival season. Across the nation, irrespective of social barriers, people consider the festival season as an auspicious event to spend on purchases that matter and what makes them happier. Banks can use this opportunity to quickly roll out token credit lines of nominal sums like up to 1 Lakh INR to consumers. Higher or lower limits may be extended with due diligence and data-driven assessment.

Such an endeavor at this point makes the UPI-linked credit line a big incentive for customers and businesses across India. At the same time, it allows banks to be a part of the financial empowerment journey of the masses. What they need is the right technology to quickly leverage the UPI framework and roll out innovative credit products to the most deserving consumers. This is where a technology partner like Verinite can be a game changer. Get in touch with us to know more. 

Sankhadeep Chakraborty

Sankhadeep heads the engineering arm in Verinite. He has been associated with the BFSI domain from the start of his career. He is a hardcore techie and innovation drives him. He believes in the saying "Nothing is impossible"

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