India: RBI's UPI Expansion With Credit Lines

Background

The Reserve Bank of India (“RBI”) in a statement dated April 06, 2023, proposed to expand the scope of the Unified Payments Portal (“UPI”) by enabling transfers to/from pre-sanctioned credit lines at banks, in addition to traditional deposit accounts. The aim of the proposal was to facilitate payments financed by credit from banks and potentially reduce the cost of such offerings, fostering the development of unique financial products for the Indian market.

Notification – Pre-Sanctioned Credit Lines through UPI

In a notification dated September 04, 2023, the RBI has provided insights into the expansion of UPI to include credit lines as a new category of funding account. Under the stipulated framework, individuals are granted the ability to conduct transactions using pre-sanctioned credit lines issued by Scheduled Commercial Banks.

Banks are required to formulate policies governing credit line usage within the UPI system, covering aspects such as credit limits, credit periods, interest rates, and other relevant parameters, all subject to their respective policies.

A credit line is a financial arrangement between a borrower and a lender that allows the borrower to access a predetermined amount of money on an as-needed basis. Using pre-sanctioned credit lines, consumers can easily transact using the UPI network and interest will be charged only on the amount of credit availed and not on the entire sanctioned amount. This comes in addition to the plethora of changes already introduced in the UPI framework, which includes linking of RuPay credit cards and prepaid wallets to UPI.

Conclusion

This development signifies a shift in how UPI can be utilized, offering users greater flexibility to seamlessly leverage their credit lines in the digital payments landscape. This move not only enables individuals to use their credit lines issued by Scheduled Commercial Banks for various transactions through the UPI system but also gives enough discretion to banks to define the terms and conditions for this usage. By providing a clear framework for integrating credit lines with UPI, this development is poised to enhance the flexibility and convenience of digital financial transactions for Indian consumers and businesses alike.

In addition to the positive implications, it's worth noting that the RBI has not extended this facility to Non-Banking Financial Companies (“NBFC”). As this facility is exclusively granted to Scheduled Commercial Banks, it may create a competitive disadvantage for NBFCs in the digital payment sector. Banks can now offer credit-based transactions and innovative financial products like Buy Now Pay Later schemes, potentially drawing users away from NBFCs for such services. It will be interesting to observe how this dynamic plays out and whether there will be future developments in this regard.

The contents of this article should not be construed as legal opinion. Recipients should take independent legal advice before acting on any views expressed herein. The comments in the article are as of the laws prevalent on the date the article was originally published. The views stated in the article are not binding on any authority or court, and so, no assurance is given that a position contrary to that expressed herein will not be asserted by any regulatory authority/courts. For any further queries or follow up, please contact Finsec Law Advisors.