With the aim of expanding the scope of UPI, the RBI has proposed permitting payments through transfer of pre-sanctioned credit lines by banks.

“UPI network will facilitate payments financed by credit from banks. This can reduce the cost of such offerings and help in development of unique products for Indian markets,” said the central bank in its statement on Developmental and Regulatory Policies.

At present, UPI transactions are enabled between deposit accounts at banks, sometimes intermediated by pre-paid instruments, including wallets. RuPay credit cards are also permitted to be linked to UPI.

The UPI platform handles 75 per cent of the retail digital payments volume. The RBI said this initiative will further encourage innovation, adding that it will separately issue detailed instructions on the same.

“There were reservations from banks on how to monetise UPI as applying MDR was prohibited. Opening credit lines will open up a revenue stream for banks that can offset the investment cost they are undertaking for UPI,” said Sumeet Srivastava, CEO and founder of spocto.

Asked if the initiative will operate on similar lines to the BNPL (Buy Now Pay Later) model, Deputy Governor M Rajeshwar Rao said there is “no real linkage to the BNPL concept as as it stands today”.

The digital lending norms introduced by the RBI in 2022 hurt several BNPL players, as they were barred from frontloading credit in cards or wallets. 

“BNPL is just one type of transaction, think widely…In essence you can actually reduce the number of cards that you carry and do those transactions on UPI rails. So, it’s more than that,” said Deputy Governor T Rabi Sankar.

”Many BNPL players had to resort to tenuous work-arounds to continue to deliver a seamless purchase experience. With access to credit lines, the point-of-purchase credit experience becomes seamless and opens up avenues to use credit across a much larger merchant base,” said Harish Prasad, Head of Banking, India, FIS, adding that this has the potential to drive transformational growth for the BNPL lending sector.

The move will enable linking of UPI for payment transactions of both secured and unsecured lending products, and will enable banks to mimic credit card offerings without issuing a physical credit card. Industry players said.

“While credit cards had earlier been allowed on UPI rails, it was done so only for the RuPay. Since most credit cards issued by private banks are on the Visa and Mastercard settlement systems, allowance of RuPay credit cards did not move the needle for them. With pre-sanctioned credit lines, private sector banks can now simply offer credit card-like products to anyone who has a UPI relationship with the bank and at any merchant that has a lightweight and low-cost QR code or other acceptance infrastructure and, also, for online merchants,” said Shivaji Thapliyal, Head of Research and Lead Analyst, YES Securities.