In a move that is being seen as a step to?allow?UPI?to mimic credit cards, the Reserve Bank of India (RBI) has allowed the operation of pre-sanctioned credit lines at banks through UPI.
RBI Governor Shaktikanta Das made this announcement while announcing the decisions of the?bi-monthly monetary policy committee (MPC) meeting on April 6, 2023. "Scope of UPI to be expanded, by permitting operation of pre-sanctioned credit lines at banks, through UPI. This will further encourage innovation," said Das.
For the unversed, a?credit line is a?preset borrowing limit that the borrower can use as and when needed,?until the limit is reached. As and when the borrowed money is repaid, it can be borrowed again from the available credit line. A credit line is similar to a?credit card, except that you don¡¯t need to carry any plastic cards in this case.
The Unified Payments Interface (UPI) is a robust payments platform supporting an array of features. Presently, it handles 75% of the retail digital payment volume in India. The UPI system has been leveraged to develop products and features aligned with India¡¯s payment digitisation goals. Recently, RuPay credit cards were permitted to be linked to UPI.
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 transfers to and from pre-sanctioned credit lines at banks, in addition to deposit accounts.?In other words, the UPI network will facilitate payments financed by credit from banks. This can reduce the cost of such offerings and help in the development of unique products for Indian markets" the RBI statement mentioned, adding that detailed instructions in this regard will be issued separately.
Also Read:?List Of Countries Adopting?UPI?For Payments
This move is expected to expand the consumer credit market in India. This step will enable?UPI services to mimic credit cards and provide low-value credit to nearly 30 crore users of the payment platform, as per a TOI report.
The RBI has already allowed banks to provide overdrafts to customers, which they can access through UPI. The new permission to transfer funds from a credit line would enable banks to structure loans like credit cards.
Bankers, as per the report, said that the success of the new product would depend on whether new rules allow banks to structure short-term loans similar to a credit card by providing interest-free credit for 30 days and reward points for transactions or not, as these are the most attractive features in credit cards for customers. However, credit cards can provide these features as they charge a fee to the merchant.
UPI's advantage over credit cards is that banks do not have to sign up new users as they can provide credit to existing customers.?Banks also do not have to incur expenses issuing cards, signing up merchants, or deploying swipe machines.
Private lenders, which earlier saw little value in pushing UPI transactions, could now get more active as they now have an opportunity to grow their loan books. Experts say that since the UPI is a public infrastructure, the RBI is likely to open up the platform to non-banks to provide credit in the future.
Also Read:?Explained: How RBIs Digital Rupee (e?) Is Different From?UPI
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