UPI changed how India pays; it can drive the future of borrowing

Scale in digital public infra can now support broader economic outcomes, with UPI transactions offering a timely, contextual view

As the Unified Payments Interface (UPI) completes a decade this year, it stands as one of India’s most consequential digital public infrastructure successes. What began in 2016 as an interoperable payments platform now powers everyday commerce for millions. UPI processes billions of transactions each month, according to the National Payments Corporation of India. As UPI enters its second decade, the larger policy opportunity lies in extending this success beyond payments and towards widening access to credit. Over the past decade, UPI has expanded well beyond person-to-person transfers. It supports merchant payments, recurring payments, transit and small-business collections for millions of businesses. In doing so, it has become embedded in the daily cash flows of households and enterprises alike. Credit Line on UPI has already extended this infrastructure into lending by banks and small finance banks. The next stage of evolution will lie in widening participation to well-regulated nonbanking financial companies (NBFCs), many of which serve micro, small and medium enterprises (MSMEs), self-employed borrowers, and customers with thin formal credit histories. 

Credit expansion on this infrastructure has been measured. Credit Line on UPI was introduced in September 2023 for banks and then expanded to small finance banks. This approach has allowed the Reserve Bank of India (RBI) to evaluate operational risks in a controlled environment. The system has demonstrated viability but its coverage remains limited relative to the breadth of economic activity on UPI. 

Three gaps constrain inclusion: Limited participation by regulated non-bank lenders, persistent MSME credit gaps despite rising digitisation, and insufficient clarity on the use of transaction data in underwriting. The current framework limits access to a narrow set of regulated entities, while non-banking financial companies serve many credit-thin borrowers and micro enterprises. MSMEs contribute about 30 per cent to gross domestic product and employ over 110 million people, yet the estimated credit gap in the sector is approximately ₹25-30 trillion. 

Despite increasing digitisation of transactions, access to credit remains documentation-led rather than cash-flow based. Payment systems generate granular and high-frequency data, but there is limited regulatory clarity on how this data can be used in underwriting. 

Addressing this requires coordination across regulation, industry standards and policy. 

For the RBI, the next phase requires calibrated expansion and clarity on data usage. A tiered framework for onboarding NBFCs to Credit Line on UPI can allow inclusion based on governance and asset quality. Large and well-regulated NBFCs can be brought in first, followed by additional cohorts. Alongside this, formal guidance on the use of UPI transaction data in credit assessment can provide clarity on permissible variables such as transaction patterns. This would enable lenders to use transaction data responsibly. 

The Finance Industry Development Council should focus on strengthening industry standards. A sector-wide code for cash flow-based lending can define minimum underwriting and disclosure norms for loans based on transaction data. In parallel, the development of a shared framework for interpreting UPI data can standardise borrower assessment. 

The Department of Financial Services can align policy for India-scale outcomes. Positioning Credit Line on UPI as a working capital tool for MSMEs can integrate it with existing policy instruments such as priority sector and credit guarantees. Targeted risk-sharing mechanisms, including partial credit guarantees for transaction-linked lending, can encourage lenders to extend credit to first-time and thin-file borrowers. 

India’s digital public infrastructure has reached a stage where scale in payments can now support broader economic outcomes. The transaction trails generated through UPI offer a timely and contextual view of economic activity. With calibrated regulation, stronger industry standards, and wider participation by regulated lenders this can expand access to credit. UPI’s first decade changed how India pays. 

Its second decade can help shape how India borrows, builds and grows.

 

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The writers are, respectively, CEO and senior fellow at Indicus Foundation, and partner, The Dialogue