Coming soon: Wider mandate for UPI to facilitate investments

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Unified Payments Interface (UPI), the popular tool to transfer money instantaneously between bank accounts, is set to penetrate our lives more in the days to come.

In his monetary policy review speech on December 7, Reserve Bank of India governor Shaktikanta Das said the single-block-and-single debit functionality in UPI will now be enhanced to facilitate multiple debits.

What did the RBI announce?

To be sure, UPI has been around since 2016 and is already used by investors. The governor’s announcement aims to make UPI friendlier.

The enhancement to single-block-and-multiple debit functionality will allow a customer to block a certain amount of money in favour of a merchant and sign a payment mandate that allows the merchant to collect the money for specified purposes when required.

An individual can now earmark money for an e-commerce merchant and after shopping, the e-commerce portal can debit the billed amount from the blocked money. This functionality will make transfer of funds easier for e-commerce, bill payments and investments in securities.

“This would be helpful for hotel bookings, purchase of securities in the secondary capital market, as also purchase of government securities using the RBI’s Retail Direct scheme, and e-commerce transactions. This will build higher degree of trust in transactions as merchants will be assured of timely payments, while the funds remain in the customer’s account till actual delivery of goods or services,” the RBI said in its Statement on Developmental and Regulatory Policies.

UPI in investments

Traditionally, investors send money to their stock brokers and mutual fund houses to invest in securities and mutual fund unit using offline and online means. Although offline methods such as cheques are things of the past, they are still used by senior citizens and those averse to internet banking.

In the digital world, net banking has become popular. Many use NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross Settlement) to transfer funds.

In setting up systematic investment plans, where funds are transferred at regular intervals, one-time mandates on NACH (National Automated Clearing House) platforms caught up in recent years. E-NACH mandates registered using internet banking or debit card credentials of the investor are popular as they cut down the time required for registration.

However, mutual fund houses and other stakeholders nowadays use the UPI autopay facility to register SIP mandates. Fund houses such as IDFC and Tata and a few distributors also offer this facility.

“While the physical NACH form-based mandate may take five to 21 days for registration, e-NACH mandates are registered within 24 hours – typically T+1 day. But UPI-based mandate registration is almost instant,” an official from a leading fund house said on condition of anonymity.

Funds debited from an investor’s account using a UPI-based mandate reach the bank account of the fund house almost instantly, whereas for other digital means, there may be a lag of a day, the official added.

Units are allotted to investors only after a fund house realises the funds.

“UPI autopay facility is being used to set up SIPs,” said Vasanth Jeyapaul, CEO of CAMS Payment Services. “It has cut the time required for registration of account debit mandates and also for transfer of funds from the bank account of the investor to the bank account of the mutual fund house.”

Investors also use UPI to fund their broking account to transact in stocks, bonds and units of exchange traded funds. Investors are well-versed with the usage of UPI to block money for initial public offering applications.

Distributors such as PhonePe use UPI autopay to offer gold SIPs – a plan that allows regular investments in digital gold.

What next?

The RBI said it will soon issue instructions to the National Payments Corporation of India, which runs the UPI system, about the single-block-and-multiple-debit mandate. The facility may be introduced for trading platforms including RBI Retail Direct and stock brokers.

“After the facility is rolled out, investors need not keep money with brokers. They just have to sign up for the mandate and block money in their bank accounts. Each time they buy securities, the bank account will be debited by the stock broker,” said a senior operations officer with a Mumbai-based brokerage.

This facility ensures that money stays in the bank account and earns interest. Brokers do not pay interest on the funds with them.

Investors need not fund their broking accounts in a hurry before trading. If there is a flash crash in the stock market or a stock is available cheap, an investor need not waste time transferring money to the broker – the buy order can be placed and the mandate takes care of the money.

The UPI-initiated Applications Supported by Blocked Amount (ASBA) for IPOs is an example of single-block-and-single-debit (or credit). Money is blocked for the IPO and if the shares are not allotted, the money is refunded.

In the case of single block and multiple debits, money will be set aside in favour of a merchant who can debit it many times for specified purposes, not for a particular security or goods purchase.

“Brokers need not be worried about receipt of funds while buying securities on behalf of their clients,” said the operations officer.

The new facility won’t be made mandatory and existing ways of funding broking accounts will also be available. It remains to be seen how multiple debit mandates are used for intra-day and derivative trading.

Signing up for an SIP using a single-block-and-multiple debit mandate will work akin to a systematic transfer plan. The funds stay in the savings bank account and are invested in the desired scheme at regular intervals.

Sometimes, the funds in an account are spent and the SIP mandates bounce. The single-block-and-multiple-debit mandate can be a solution to this problem.

While investors are expected to benefit from the new facility, the actual modalities will decide how all stakeholders will gain. Even for existing facilities such as UPI autopay, there is a long pathway to growth.

“So far, 150 banks allow real-time registration of UPI autopay facilities. Many individuals use UPI for making small payments, not everyone is geared up to use it for setting up investments. As investors become more aware of such facilities, and payment aggregators such as us, AMCs/NBFCs and banks proactively take it to clients, UPI-based payment facilities for investment activities will catch up,” said Jeyapaul of CAMS Payment Services.