What Changes With RBI’s New Directions On Credit On UPI?

A few years after launching credit on UPI, the RBI has now reiterated the regulatory framework governing credit on UPI, bringing the rules for pre-sanctioned credit lines in line with existing lending norms for banks.

Under the updated guidelines, the central bank has mandated that all UPI-linked credit lines follow the exact same prudential norms and regulations as traditional loans. This eliminates the regulatory loopholes that previously allowed banks to treat UPI credit products differently depending on the platform or app.

The RBI has mandated that any credit facility linked to a specific payment mode be formally integrated into the bank’s internal credit policy. Now, lenders, who have already secured pre-requisite approvals under lending regulations, can offer credit facilities through these channels. 

For the uninitiated, the RBI and NPCI introduced credit lines on UPI in September 2023 to expand on-demand digital access to credit. The RBI first enabled commercial banks to offer credit lines to their customers via UPI back in September 2023, and extended the facility to SFBs a year later. 

With this directive, the RBI has now aligned the norms governing credit on UPI with those applicable to any other credit facilities in order to ensure consistency in the application of regulations. 

What The RBI’s New Directive Changes And Why It Matters

In essence, the reiteration would help the RBI keep a tighter oversight over banks enabling credit facilities on digital platforms, shutting a loophole wherein credit facilities offered through UPI could be treated differently. 

As per Shardul Amarchand Mangaldas & Co partner Hemant Krishna, the rules don’t bring in a set of changes but rather reiterate what’s already in place.

“Historically, the RBI has felt that some fintechs and banks were trying to misuse payment instruments as backdoor mechanisms to issue credit without adhering to the lending guidelines. They have clarified that if you link UPI and the credit line, the treatment of the credit line should be consistent with the prudential norms for the lending underneath it,” he said. 

The norms include guidelines on the classification of the loan, the KYC process, recognition of NPAs, provisioning and capital adequacy ratios, among others. 

While the end consumers are unlikely to see any real differences in the type of credit on UPI products, the directive does have implications for the back-end operations for fintech and financial institutions. For instance, it clarifies that a personal loan extended through UPI differently and one delivered via any other mechanism must be treated identically on a bank’s books.

The Big Picture 

According to Krishna, the central bank is extending the stance it took in 2022 when it banned the loading of non-bank prepaid payment instruments (PPIs) via pre-sanctioned credit lines. 

“Some players tried to take the view that the prudential norms on lending can be bypassed by partnering with a PPI issuer, which is what the RBI was trying to remedy through that clarification. This is a continuation of the same principle that credit is credit and prudential norms will apply regardless of what mechanism is used to deliver it,” he adds.

However, while the RBI’s PPI clampdown was to restrict problematic lending that bypassed norms in the guise of innovation, its directive on credit on UPI is unlikely to create the same kind of widespread disruption of business models. 

“It is a proactive move to say that credit on UPI needs the same diligence as any other credit product. The guidelines are not out of sync with what is being practised in the market,” a fintech founder told Inc42 on the condition of anonymity. 

According to him, the RBI is also laying down guardrails in order to enable the future growth of the space through the right practices. 

“Today, credit on UPI is only available to banks, it is not available to NBFCs. But compared to banks, NBFCs have been the larger capability providers for consumer credit products. They dominate transactions for consumer finance for things like credit card EMIs. Currently, credit on UPI is still very gated and there is a belief that uptake may be tougher without opening it up as the majority of fintech loans happening today are through NBFC partners and not commercial banks,” he added. 

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