nvidia: RBI allows pre-sanctioned credit lines through UPI; know how it works

The Reserve Bank of India (RBI) enabled transactions to or from pre-sanctioned credit lines at banks through the Unified Payments Interface (UPI) System, the central bank announced on Monday. As of now, only savings account, overdraft account, prepaid wallets and credit cards could be linked to UPI.

“As announced, the scope of UPI is now being expanded by inclusion of credit lines as a funding account,” the bank said in a circular titled ‘Operation of Pre-Sanctioned Credit Lines at Banks through UPI’.

“Under this facility, payments through a pre-sanctioned credit line issued by a Scheduled Commercial Bank to individuals, with prior consent of the individual customer, are enabled for transactions using the UPI System,” it further stated.

The RBI, in April, suggested to expand the scope of the UPI with inclusion of credit lines in addition to deposit accounts, which will further help in reduction of cost of such offerings and help in development of unique products for Indian markets.

How does it work?

UPI, used for immediate money transfer through mobile devices round the clock, transactions crossed the 10-billion-mark in August. The number of UPI transactions in July was 9.96 billion (996.4 crore) and 9.33 billion in June.Introduction of credit lines in UPI transactions is set to help not just the banks but also businesses and consumers. “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,” wrote Sajish Pillai, Managing Director, Assets and Strategic Alliances, Consumer Banking Group at DBS Bank India on TOI.

He explained, “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, Pillai added.

For the user, be it a business or a consumer, Pillai explained that this initiative by the RBI will enable them 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.

Given how cost-effective UPI is, this provision will enable banks to provide small credit limits with no hassles of distribution among other things, to segments which have been out of the reach of the banking industry.