Credit on UPI kicks off in move to further democratise funding

Credit on UPI essentially means besides credit cards, banks, which have fully approved, pre-sanctioned, credit lines available towards a large number of customers, can offer these lines at an interest rate based on the credit limit utilised and the historical customer spending behaviour. Image: Shutterstock

India’s largest private sector banks—HDFC Bank and ICICI Bank—are working on products as part of the credit on Unified Payments Interface (UPI) programme. After a go-ahead to launch such products from the Reserve Bank of India (RBI) this month, this is one more step to leverage on the success of public digital infrastructure.

And if bank customers do adopt it, it could get pure buy-now-pay-later (BNPL) fintechs and even credit card companies to further rethink their business models and products, to ensure customer stickiness and relevance, after a regulatory crackdown in 2022.

“Credit on UPI essentially means besides credit cards, banks, which have fully approved, pre-sanctioned, credit lines available towards a large number of customers, can offer these lines at an interest rate based on the credit limit utilised and the historical customer spending behaviour. This is about taking the lines and linking them to UPI.  It will help democratise and expand the funding of loan transactions,” Parag Rao, country-head (payments business, consumer finance, technology and digital banking), at HDFC Bank tells Forbes India.

 The RBI, in its September 4 notification, said: “At present, UPI transactions are enabled between deposit accounts at banks, sometimes intermediated by pre-paid instruments including wallets. It is now proposed to expand the scope of UPI by enabling transfer to / from pre-sanctioned credit lines at banks, in addition to deposit accounts.”

Banks may, as per their board-approved policy, stipulate terms and conditions of use of such credit lines. The terms may include, among other items, credit limit, period of credit, rate of interest, etc.

The new credit lines

HDFC Bank has announced a ‘UPI Now Pay Later’ product on its website, which it is still testing and will launch soon. ICICI Bank has already launched a ‘PayLater’ product. These are overdraft facilities provided by a bank to an account holder, which can be utilised through all UPI-based apps including Google Pay and MobiKwik. The account holder can use to make small-ticket online purchases, in addition to the standard options like credit and debit cards.

Both the banks have kept a maximum credit line of Rs 50,000 based on the account holders’ eligibility. Obviously, the credit limit for each person would vary, based on their income, spending pattern and re-payment history.

In the case of the HDFC Bank credit product, the interest rate will be calculated on the basis of the number of days you use the credit line. For example, if customers use a newly available credit line of Rs 5,000 for 10 days, then they will be charged an interest for 10 days only, which will be debited from the specific account at the end of the month.

The main limitation while using this product is that the account holder has to use this credit towards paying a merchant category and not a peer-to-peer (P2P) transaction.

In the case of ICICI Bank’s PayLater product, the account holder will get up to 45 days of zero-interest digital credit. The amount could be used towards paying bills, online shopping and paying to any merchant UPI ID instantly.

Other banks are in the process of working on and launching similar products, “after weeks of technical readiness,” says PwC’s partner and payments transformation leader, Mihir Gandhi.

The number of transactions using UPI touched a record high of 1,024.7 crore in August, worth Rs 15.18 lakh crore, statistics from the National Payments Corporation of India (NPCI) showed.  This indicates a year-on-year volume growth of 55.6 percent and value growth of 41.4 percent.

In the PwC’s Indian payments handbook 2022-2027, Gandhi forecasts UPI to constitute almost 90 percent of total transactional volume in retail digital payments by 2027, by expanding its adoption to rural areas and tier 3 and 4 cities.

Also read: Axis Bank's message is clear: Bank more to gain more

The RuPay on UPI expansion

In June, the RBI allowed linking of the RuPay credit card to the UPI application. The central bank has been trying to make the domestic card more competitive with international giants such as Visa and Mastercard. In July, the RBI said, in future customers should be given the option to choose any one among multiple card networks and that card issuer banks will henceforth have to issue cards from more than one network provider. The changes are likely to take effect from October 1.

HDFC Bank’s Rao says, “Prior to the process of linking RuPay cards to UPI, the number of RuPay cards issued independent of this linking was estimated at just 5-6 percent of the credit card business. Now there is a use case of linking RuPay cards.”

HDFC Bank went live with this in April this year. “So far I estimate that 8 to 10 lakh cards have been issued, which are linked to the UPI system, with limited issuers. Give them another six months, it is bound to pick up.”

At present, Punjab National Bank, Union Bank of India, Indian Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, Canara Bank, State Bank of India, Yes Bank and BOB Financial Solutions are live with the RuPay credit cards on UPI, according to the NPCI website. The RuPay linking will not permit P2P and P2PM (small merchants and the unorganised retail rector) card to card payments.

Linking the cards to UPI helps a bank’s customer due to an increased opportunity to use credit cards on UPI and for the merchant it means more consumption in the form of cards usage.

Experts say credit on UPI will only expand the market further and not necessarily hurt credit card issuers.  “Credit card and loans have been deeply under-penetrated in India, so multiple forms of lines will expand the market. Experts are bullish that this programme will help in expanding the credit card market and making it larger, with a potential 30 to 40 crore card holders joining in, as they will transact and use a higher level of product to fund themselves,” Rao says.

Also read: Co-branded credit cards: The battle for the top spot

Pressure on BNPL fintechs?

With credit on UPI taking shape, we are bound to see an impact on pure BNPL fintechs. “Their business may get impacted once credit on UPI picks up,” PwC’s Gandhi says. These had grown rapidly over the last five years or more, focussing on reaching out to millennials and Gen Z, offering low-interest rates on low-ticket consumer loans and a richer transacting experience.  

Some of the most popular players in this space include ZestMoney, Ezetap (acquired by Razorpay), KredX, MobiKwik, Amazon Pay, LazyPay and Simpl.

But the lack of a substantial credit history has meant late or non-payments from customers to BNPL fintechs. This, in turn, led to higher non-performing assets (NPAs), financial losses and made fresh capital raises difficult for some players. Regulatory challenges have also emerged after the RBI in 2022 told non-banks that they will not be allowed to load prepaid payment instruments (PPIs) through credit lines. Fintechs had no option but to tie-up with a regulated entity (banks or NBFCs) to offer credit lines. It led to an implosion within the BNPL ecosystem.

Considering that formal lending activity is still a low percentage in India, credit on UPI is about putting a structured lending product on a structured network issued by a regulated entity.

Coming weeks will see more banks launch similar credit on UPI products, where there would be a mix and match between interest rates, fees charged and loan amounts. The next logical step from banks will be to underwrite for a person who might not have an account aligned with that particular bank.