RBI grants credit lines through UPI to small finance banks

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The Reserve Bank of India (RBI) has permitted small finance banks (SFBs) to extend pre-sanctioned credit lines through the Unified Payments Interface (UPI) in an attempt to expand the reach of credit on UPI. Introduced in 2016, UPI offers instant money transfers and is a single mobile application for accessing different bank accounts.

In September 2023, the scope of UPI was expanded by enabling pre-sanctioned credit lines to be linked through UPI and used as a funding account by scheduled commercial banks, but that excluded payment banks, small finance banks, and regional rural banks.

“It has now been decided to permit small finance banks also to extend pre-sanctioned credit lines through the UPI. This will further deepen financial inclusion and enhance formal credit, particularly for ‘new to credit’ customers,” Shaktikanta Das, RBI’s Governor, said in his Monetary Policy statement. Monetary Policy refers to actions taken by a country’s central bank to manage the money supply and influence economic activity.

Small finance banks 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. According to the RBI’s statement on Developmental and Regulatory Policies, the credit line on UPI has the potential to make available low-ticket, low-tenor products to ‘new-to-credit’ customers.

The UPI has seen a tenfold increase in volume over the past four years, from 12.5 billion transactions in 2019-20 to 131 billion transactions in 2023-24, or 80% of all digital payment volumes. The UPI witnessed a milestone of 16.6 billion transactions in October alone. 

India is also looking to expand UPI use across the world so that any Indian with a UPI account can make a payment using UPI. So far, UPI has expanded to the United Arab Emirates (UAE), Peru, Mauritius, Sri Lanka, Singapore, France, Bhutan 
and Nepal. 

Earlier in December, the RBI issued an amendment to the framework for facilitating small-value digital payments in offline mode, increasing the transaction limits for UPI LITE. UPI LITE is a payment solution that processes low-value transactions. The solution runs off existing UPI ecosystem protocols for mobile phones to ensure commonality, compliance and system acceptance. 

“The offline framework has been updated and the enhanced limits for UPI Lite shall be ₹1,000 ($11) per transaction, with ₹5,000 ($59) being the total limit at any point in time,” RBI said. 

UPI LITE is considered a customer-friendly approach, enabling low-value transactions without utilizing a remitter bank’s core banking systems in real time while providing adequate risk mitigation.

In November, the National Payments Corporation of India (NPCI), responsible for operating retail payments and settlement systems in India, conducted an event as part of the NPCI Synergy initiative. The event featured senior leaders from small finance banks (SFBs) and payments banks and recognized their efforts in shaping the future of India’s digital payments through innovation, partnerships, and collaboration. 

“SFBs and payments banks offer last-mile connectivity solutions, drive financial inclusion, and foster trust in underserved regions. Through initiatives like NPCI Synergy, we are committed to shaping the future of payments and driving inclusive growth for all,” said Dilip Asbe, MD & CEO of NPCI.

Recently, the RBI also suggested small businesses adopt digital payment systems, like the UPI, to create a digital footprint for their financial transactions. This is expected to make it easier for lenders to assess the firm’s financials and reduce the credit gap.

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