Credit on UPI can transform financial access for underserved borrowers

Over 40 per cent of Indians are estimated to have limited or no access to formal credit. National Payments Corporation of India (NPCI), which operates the Unified Payments Interface (UPI), launched the Credit Line on UPI (Clou) in 2023 to help bridge this gap. This had been designed to make credit as frictionless as digital payments, allowing users to access a pre-approved credit line directly through their UPI app. As reported by this newspaper, nearly two years later, the adoption has remained limited because banks and fintech companies remain uncertain about its treatment and reporting requirements. Without course correction, this innovation could stall. The experience of UPI offers valuable lessons on how Clou can evolve into a truly inclusive credit system. A recent paper, published by the National Bureau of Economic Research, “Breaking Barriers to Financial Access”, by Shashwat Alok of the Indian School of Business and others, provides strong evidence on how public digital infrastructure can reshape credit markets. It shows that between 2015 and 2019, credit increased rapidly, and fintech loans in the subprime and new-to-credit segment witnessed a 10-fold increase. In the aggregate, a 1 per cent increase in UPI transactions was associated with a remarkable 0.73 per cent increase in credit.

 

Importantly, this expansion did not lead to higher defaults, suggesting that UPI-enabled digital footprints helped lenders identify underserved but creditworthy borrowers. The cross-platform payment infrastructure allows prospective borrowers to create alternative data in the form of verifiable digital-transaction trails, which lenders can use to assess borrower creditworthiness. Such infrastructure could reduce information asymmetries, lower loan-origination costs, and expand access to underserved households. Clou has the potential to build on this foundation. But to succeed, it must overcome regulatory ambiguity, uneven technological readiness among banks, and limited awareness among borrowers. Research suggests that complementarities such as an affordable internet and the Jan Dhan Yojana bank account drive amplified UPI’s impact. Areas that had both a low-cost internet and widespread bank-account access saw the strongest credit growth. For Clou, similar ecosystem support will be crucial — from robust credit-information systems to interoperable tech platforms that enable small lenders to participate effectively.

 

However, regulatory ambiguity persists over how Clou loans are to be classified and monitored — whether as personal loans or credit-card loans. Many small lenders also lack the technical infrastructure to integrate with UPI’s real-time systems. Without coordinated policy action, Clou risks joining the list of promising but underused innovations. The Reserve Bank of India (RBI) and NPCI need to issue unified operational guidelines, clearly defining how Clou loans are to be classified and reported. A standardised data-sharing and consent framework will build trust between lenders and borrowers. Support for smaller banks through shared cloud-based infrastructure or partnerships with fintechs can reduce the digital divide in credit delivery. India’s experience with UPI showed that when digital infrastructure is open, interoperable, and affordable, it can transform financial access at scale. Clou can do the same for credit access.