Explained: RBI allows pre-sanctioned credit through UPI

The Reserve Bank of India (RBI) announced that it will allow pre-sanctioned credit lines through the Unified Payments Interface (UPI). This is a major step forward for the Indian financial system, as it will make it easier for people to access credit and make payments using the UPI.

UPI is a payment platform and currently handles 75% of the retail digital payments volume in India. The system has been leveraged to develop products and features aligned to India’s payments digitisation goals. Recently, RuPay credit cards were permitted to be linked to UPI. At present, UPI transactions are enabled between deposit accounts at banks, sometimes intermediated by pre-paid instruments including wallets. Expanding the scope of UPI by enabling transfer to/from pre-sanctioned credit lines at banks, in addition to deposit accounts will significantly help users. In simple terms, the UPI network will now facilitate payments financed by credit from banks.

RBI explains through its notification, “Currently, savings account, overdraft account, prepaid wallets, and credit cards can be linked to UPI. As announced, the scope of UPI is now being expanded by the inclusion of credit lines as a funding account.”

The apex bank notification further clarifies:

Under this facility, payments through a pre-sanctioned credit line issued by a Scheduled Commercial Bank to individuals, with the prior consent of the individual customer, are enabled for transactions using the UPI System.

Banks may, as per their Board approved policy, stipulate terms and conditions of use of such credit lines. The terms may include, among other items, credit limit, period of credit, rate of interest, etc.

The directive is issued under Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007 (Act 51 of 2007).

Operation of Pre-Sanctioned Credit Lines at Banks through Unified Payments Interface (UPI)https://t.co/KF46MtvA1j
— ReserveBankOfIndia (@RBI) September 4, 2023

UPI is a real-time payment system that allows users to send and receive money instantly. It is one of the most popular payment methods in India, with over 10 billion transactions processed in August 2023.

The RBI’s decision to allow pre-sanctioned credit lines through UPI will make it easier for people to access credit without having to go through a lengthy application process. This is especially beneficial for small businesses and people with limited credit history.

To avail of a pre-sanctioned credit line through UPI, a customer will need to have a bank account and a UPI ID. They will also need to be pre-approved for a credit line by their bank. Once they are pre-approved, they will be able to use their UPI ID to make payments using the credit line.

The RBI has put in place a number of safeguards to ensure that the use of pre-sanctioned credit lines through UPI is responsible. For example, banks will be required to set a maximum limit on the amount of credit that can be used through UPI. They will also be required to charge a reasonable interest rate on the credit.

Here are some of the benefits of the RBI’s decision:

It will make it easier for people to access credit, especially those who have limited credit history.
It will help to promote financial inclusion in India.
It will reduce the need for cash transactions, which will make it safer and more convenient to make payments.
It will boost the growth of the digital economy.

RBI’s decision to allow pre-sanctioned credit lines through UPI will make it easier for people to access credit and make payments hassle-free.