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You can now pay with UPI using credit lines

The move can give consumers more flexibility in their payments, while also allowing merchants to benefit from the increased purchasing power of consumers without having to invest in swiping machines.

What’s the news? Unified Payments Interface (UPI) can now be used with pre-sanctioned credit lines from banks, the Reserve Bank of India (RBI) announced on September 4.

Until now, savings accounts, overdraft accounts, prepaid wallets, and RuPay credit cards could be linked to UPI. With this latest announcement, credit lines can also be linked to UPI. The banks that will support this feature are yet to be known.

“Under this facility, payments through a pre-sanctioned credit line issued by a Scheduled Commercial Bank to individuals, with 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.,” RBI stated.

What are credit lines? Credit lines are pre-approved borrowing limits. There are multiple types of credit lines such as credit cards, small credit lines, and business credit lines. Credit lines differ from loans in many ways: interest is charged only on the amount of credit availed not the entire sanctioned amount, interest is generally higher when compared to loans, less paperwork and collateral requirements than loans, access to credit gets replenished every time payment is made.

Credit lines are not the only means for consumers to pay using credit. UPI can also be linked with RuPay credit cards. It might be more beneficial for consumers to pay using RuPay credit cards because credit cards come with an interest-free period for making payments, unlike credit lines. However, not all users might be eligible for a credit card.

How will the move affect the market? This idea was mooted by RBI in April and was welcomed because it gives consumers more flexibility in their payments thanks to the lending from the bank. Merchants also stand to benefit from the increased purchasing power of consumers without having to invest in swiping machines, which would’ve been required to allow buyers to pay using credit cards. It also benefits banks because they can earn interest from this credit.

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This facility could also help lenders assess creditworthiness. “By providing a rich and reliable data trail of transactions, UPI can enable lenders to assess the creditworthiness of potential borrowers based on their income, spending patterns, and repayment behaviour. The widespread use of QR codes can allow borrowers to access credit via UPI very easily and securely, eliminating the need for branch visits or lengthy application procedures,” Sajish Pillai from DBS Bank India wrote for Times of India in January this year.

Some banks like HDFC and ICICI already offer a credit facility using UPI. For example, HDFC offers UPI Now PayLater, which is an overdraft facility that can be utilised via all UPI apps. But this facility is only for credit up to ₹50,000 with a maximum credit period of up to 6 months.  While it’s not immediately clear how the new credit line facility will be different from this existing offering by HDFC, it could allow higher amounts and longer repayment timelines.

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