Reserve Bank of India (RBI) governor Shaktikanta Das on April 6 announced a new measure where users of the unified payments interface (UPI) can avail a pre-sanctioned credit line through banks. In other words, users or borrowers can avail funds from a bank-approved credit line through UPI. This was among the major announcements made at the first monetary policy review of the fiscal year 2023-24.
So does this mean that a user can avail a loan through UPI? Is a credit line and a loan the same? If you have seen the headlines, here is an explainer to understand the development in detail.
Credit line through UPI
Under the new measure, UPI users can avail funds through a bank-approved credit line via UPI.
Das highlighted that with the wide reach of UPI and in addition to the previously announced facility of linking RuPay credit cards to UPI, the new proposal to permit the operation of pre-sanctioned credit lines at banks through UPI will encourage innovation.
“UPI’s robustness has been leveraged to develop new products and features from time to time. This will encourage innovation," Das said.
Also read: RBI Policy: Avail funds from banks through UPI as RBI allows pre-sanctioned credit lines
But first, what is a credit line?
A credit line is a lending facility where a borrower can borrow money on a flexible and revolving basis from a lender. It is a predetermined borrowing limit that a user can avail of at any time. To get a credit line, a borrower needs to apply for the same with the lender.
Compared to a traditional loan, a credit line is a more flexible mode of borrowing. Interest rates, on the other hand, are higher for credit lines. Some of the different types of credit lines include credit cards, small credit lines, etc.
What is the process of availing a credit line through UPI?
Prior to availing the funds on UPI, borrowers have to first get a sanctioned line of credit from a bank. This process involves banks going through a verification process, which is similar to that of a loan.
The verification process involves the lender checking the personal financial details of the borrower like income, credit score, borrowing history, etc, and deciding the credit line limit.
After this process, borrowers can avail the funds approved under the credit line on UPI.
What are the types of pre-approved credit lines?
The different types of pre-approved credit lines under the new measure include credit card, small credit line, business credit line, etc. The limit of each line of credit is decided by the lender after a thorough verification.
Also read: NPCI recommends additional charges for merchant transactions via UPI
Will this invite additional charges on UPI?
In March 2023, a circular issued by the National Payments Corporation of India (NPCI) suggested that Prepaid Payment Instrument (PPI) charges be applied in the form of an interchange fee from April 1 for merchant transactions made using UPI. An interchange fee is paid between banks for processing UPI transactions.
The charges include an extra interchange fee of 1.1 percent on the merchant receiving the payment of more than Rs 2,000 using PPIs. But the charge is only applicable to a customer who has a wallet of one company and makes payment to the receiver whose wallet is of another company.
Other than this, there are no charges on bank account-to-bank account-based UPI transactions.
Das, in his MPC statement, did not mention any charges on the credit line facility through UPI.
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