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Expanding Consumer Credit: UPI to Offer Low-Value Credit

Good news for Indian consumers! The Reserve Bank of India (RBI) has made a significant move to expand the consumer credit market in the country. Banks are now permitted to transfer pre-sanctioned credit lines through the UPI network, opening up new possibilities for nearly 300 million users of this popular payment platform.

So, what does this mean for you? Well, it means that UPI services can now function like credit cards, providing low-value credit to users. The RBI had already allowed banks to offer overdrafts through UPI, and now they can transfer funds from credit lines, allowing for structured loans similar to credit cards.

This development is set to benefit both banks and customers. For banks, it's an opportunity to grow their loan books and reach a wider customer base without the need to sign up new users. They can provide credit to existing customers, eliminating the need for additional cards or swipe machines.

Now, let's talk about the benefits for you, the consumer. The new product's success hinges on whether banks can offer attractive features similar to credit cards. This includes interest-free credit for 30 days and reward points for transactions. These perks are what customers find most appealing in credit cards. However, unlike credit cards that charge a fee to the merchant, UPI provides an advantage by offering these features without additional costs.

Private lenders, such as HDFC Bank, who were initially less active in UPI transactions, now have a chance to increase their loan books and tap into this growing market. Moreover, experts predict that the RBI might allow non-banks to provide credit on the UPI platform in the future, further expanding access to credit.

This move not only promotes financial innovation but also encourages business expansion in the new-to-credit market. Non-banking financial companies (NBFCs) have faced restrictions in providing digital credit, while banks have had the advantage of offering overdrafts through UPI. By including non-banks in the process, the UPI infrastructure can truly unlock its full potential.

In summary, the RBI's decision to allow banks to transfer pre-sanctioned credit lines through UPI is a game-changer for the consumer credit market in India. With the potential to mimic credit cards, UPI can now offer low-value credit to millions of users. It's a win-win situation for banks, customers, and the overall economy. As the UPI platform continues to evolve, we can expect even more financial innovations to empower individuals and fuel economic growth.



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