RBI allows small finance banks to offer pre-sanctioned credit line on UPI

Step will 'further deepen financial inclusion and enhance formal credit', says central bank

The Reserve Bank of India (RBI) on Friday allowed small finance banks to offer pre-sanctioned credit lines through Unified Payments Interface (UPI). Previously, only scheduled commercial banks were allowed to offer pre-sanctioned credit lines on the flagship payments platform.

 

“This will further deepen financial inclusion and enhance formal credit, particularly for ‘new to credit’ customers,” said the RBI after the monetary policy kept the key interest rate unchanged but cut the cash reserve ratio that banks are required to hold.

 

In September 2023, UPI's scope was expanded by enabling pre-sanctioned credit lines to be linked through the platform and used as a funding account by commercial banks, excluding payments banks, small finance banks (SFBs) and regional rural banks.

 

UPI credit line is meant to empower individuals and small businesses to obtain pre-sanctioned credit lines, which can be utilised immediately for transactions through the payments platform. It facilitates availability and frictionless usage of credit lines, overdrafts and retail loans, fostering economic growth and enhancing financial inclusion.

 

Axis Bank, Bank of Baroda, City Union Bank, HDFC Bank, ICICI Bank, Indian Bank, Karnataka Bank, Punjab National Bank, State Bank of India, and Tamiland Mercantile Bank offer pre-sanctioned credit lines on UPI.

 

“Credit line on UPI has the potential to make available low-ticket, low-tenor products to ‘new-to-credit’ customers,” RBI said, adding that SFBs leverage a high-tech, low-cost model to reach the last mile customer and can play an enabling role in expanding the reach of credit on UPI.

 

“It is, therefore, proposed to permit SFBs to extend pre-sanctioned credit lines through the UPI”, RBI added.

 

There are around monthly credit transactions worth Rs 10,000 crore, of which approximately Rs 100-200 crore is from the “credit line on UPI” facility, while the remainder comes from the RuPay credit card on UPI facility,

 

In November, UPI transactions saw a 7 per cent drop in volume to 15.48 billion and an 8 per cent fall in value to Rs 21.55 trillion compared with the previous month. In October, transactions touched an all-time high, driven by festive sales. In October, UPI recorded 16.58 billion transactions worth Rs 23.5 trillion, the highest since the digital system became operational in April 2016.