Credit Line on UPI: Banks Hold all the Aces (#68)

Onus on banks to lay the roadmap to take Credit Lines to hundreds of millions on UPI

Dec 03, 2023

Welcome to the 68th issue of Unit Economics. In this article, I share opinions and insights on the very exciting, and potentially transformative, developments in Credit on UPI. Dive in!

On 6th April this year, the RBI proposed “to expand the scope of UPI by enabling transfer to / from pre-sanctioned credit lines at banks, in addition to deposit accounts.” The explicit mention of “credit lines” and “pre-sanctioned”, both terms without formal RBI definitions, led to ambiguous interpretations and sentiments. There was discourse, although little, but it was clearly too early to reserve judgments on the subject.

Five months later, and fashionably on the last evening before the Global Fintech Fest, the RBI issued a directive to formally expand the scope of UPI through the inclusion of credit lines. Apart from the directive acting as the green light to Credit Lines on UPI, there was little substance in the circular on the definition and scope of “credit lines”. However, it did seem a signal for banks to take over the baton with one of the clauses stating:

“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”

Regardless, the timing of the circular and the fervour of the live demo during the Global Fintech Fest meant a lot of murmurs surrounded the announcement. Mostly filled with assumptions and questions.

The ambiguity remained. Even despite a more elaborate operating circular on the subject.

Yet, on the surface, there was merit to the optimism surrounding the potential of the Credit Line on UPI. Particularly because it suggests a form of credit on UPI that

would come without the complications of co-branding, unlike credit cards,
would have less underwriting limitations than for credit cards,
may be viable in the form of lower-ticket, sachet credit to millions of new-to-credit or non-carded customers, and
may allow more innovative payment terms of credit, not bound by the traditional credit card directions

I had experienced the customer love for Credit Line on UPI in a similar form closely at Jupiter. The promise seemed obvious. The announcement pushed me to explore the possibilities of Credit Line on UPI. And over the next few weeks, I spent a good amount of time talking to banks and the NPCI. Here is what I learned.

Firstly, while Pre-Sanctioned Credit Lines were allowed to be offered over UPI, the fine print excluded the Small Finance Banks (SFBs) and Payment Banks from the definition of Scheduled Commercial Banks (SCBs). The NBFCs, naturally, were out of the ambit.

Now, of the allowed SCBs, only two banks - ICICI Bank and HDFC Bank - had a defined, board-approved policy for an internal product that may be offered as a “Credit Line” on UPI. Both products, incidentally, were overdraft facilities for Existing-to-Bank (ETB) customers. As you would be aware, the overdraft facilities had existed before with both banks and were made operational under UPI 2.0 in 2018.

Incidentally, the launch of “pre-sanctioned credit lines” on UPI pushed the same overdraft facilities to be repurposed as PayLater by the ICICI Bank and UPI Now, Pay Later by the HDFC Bank.

From a bank’s perspective, it is understandable how overdraft facilities fit the “pre-sanctioned credit lines” bill, given that such facilities are often (a) pre-approved to ETB customers as per their previous relationship with the bank, and (b) act as flexible, revolving loans that may be availed as per credit needs.

Additionally, with the RBI and the NPCI’s push towards credit on UPI, it appeared an opportune moment for Banks to increase distribution of their overdraft facilities with the help of existing distribution of UPI PSPs and TPAPs.

However, it does beg the question of whether the pre-sanctioned credit lines were meant to be a rebranding of overdraft facilities. Surely not, right?

We assume there to be more to it. However, with the absence of any master directions or guidance from the RBI on credit lines, along with the recent severity on consumer credit practices from the central bank, it would be wrong to falter banks for being conservative or unimaginative.

As you would imagine, conversations within the ecosystem, with other scheduled commercial banks, have yielded similar interpretations of pre-sanctioned credit lines. Away from the ICICI Bank and the HDFC Bank, there are hardly any other banks on the horizon with ready solutions, with a handful putting across a 6-12 month horizon to introduce their versions of credit lines on UPI.

The banks are clearly in no hurry, and I could summarise the why under three reasons.

Risky to loosely interpret the scope beyond the traditional assets

The lack of directions from the RBI and limited room for loose interpretations make any new product definition a risk too large for banks to take. Some bankers deem it “against the spirit of banks and RBI” to expect an interest-free definition of a credit line, for instance.

Therefore, until the RBI signals or a bank takes precedence, most banks seek comfort in utilising the existing definition to activate their ETB customers on overdraft facilities via UPI, while tightening the screws on their existing and growing unsecured retail lending portfolio.

Higher mindshare for Credit Cards on UPI

Credit cards on UPI appear to be assuming a significantly higher business priority for TPAPs and most banks. This is, in part, due to the strong push from the NPCI to increase adoption of the RuPay credit cards across the UPI ecosystem.

Additionally, however, banks do find merit in keeping their focus on credit cards for many other reasons:

clearly defined system architecture, including for card management systems and switch-level integrations over UPI,
acquisition of new, carded, and higher-income customers, who can provide higher lifetime revenue to banks,
potential for better MDR, and consequently, interchange economics, and
potential to gain or lose market share in credit cards, with a degree of credit card usage expected to migrate towards UPI.

With the credit card on UPI volumes already above ₹100 Crores a day, and on track to 5X within the next year, the higher mindshare may be well justified.

Complex Integrations needed between Banks and Switches

A few structurally important questions linger around how the credit line may be integrated with the UPI switch partners, which is complicating the GTM for banks.

Let me explain. For instance, today, the data associated with a customer’s deposit account, prepaid instrument, and credit cards from Yes Bank may all be present in the core banking system (CBS) and passed via Juspay (the UPI switch partner) to NPCI. Now, this would imply the existence of relatively deep integrations and understanding between Juspay and Yes Bank’s CBS.

However, with Credit Line on UPI, Juspay may now be required to additionally integrate with the bank’s Lending Origination System (LOS) and Lending Management Systems (LMS), outside the CBS, for many loan-like use cases.

These may include use cases such as,

performing new customer onboarding or discovering pre-sanctioned lines of existing customers,
fetching available credit line balance to display to customers, or fetching the bill generated after each cycle,
adjusting balance and dues in the LMS on each transaction and repayment

Further, since such loan-based systems already exist in-house with scheduled commercial banks, the banks cannot rely on any white-label third-party vendor solutions to offload their effort. Rather, they will need to internally update their systems to allow credit line related capabilities to be operated and integrated with the UPI switches.

It is well worth noting that it has been less than three months since the operating circular was rolled out, and the area of Credit Line on UPI remains unruly and nascent.

However, while banks may appear relaxed, their fintech counterparts, old and new, are jittery to get moving, given the potential scale and revenue of the opportunity.

As it stands, unless you are a large existing TPAP or PSP, making a play on Credit Line on UPI may be a little challenging and uncertain:

With the banks primarily looking to activate ETB customers on credit lines presently, the acquisition costs for any fintech without a sizeable existing customer base may be unjustifiably high given the limited pool of customers. The present position of banks likely benefits the large TPAPs - PhonePe, Google Pay, Paytm, and CRED, who have a head start to activate and engage their existing customer base on credit lines. In time, as banks may build customer journeys and tech stack for new-to-bank (NTB) customer acquisitions, the funnels may be well optimised for larger UPI providers by then.
Convincing banks to build a custom credit line product, for instance - a 15-day interest-free credit line or one with EMI-conversion functionality, is going to be a hard sell with larger scheduled commercial banks, and might require fintech companies to wait until smaller banks and NBFCs are cleared through regulations and certified by the NPCI.
The NPCI’s overheads due to the high number of TPAP applications have pushed them to be more picky towards who may or may not be provided a business approval for the TPAP certification, which has made the road for newer fintech companies significantly more challenging. For instance, Navi, despite likely checking off most boxes, also took almost a year to get the certification approval.

Banks hold all the aces, but what is the winning play?

I have strong conviction that Credit Line on UPI, in the medium to long term, offers a large opportunity to take credit to the non-carded customers, including to more than 150 Mn Indians within bureau records and without credit cards.

Many of these customers today struggle to access credit cards due to income, location, or other variables. Consequently, they rely on Personal Loans as the only source of consumption credit, and will likely find credit lines a much lower-cost, accessible, and flexible alternative.

However, realising this opportunity will require multiple shifts away from the default state.

RBI and Banks will need to be open to onboarding New-to-Bank (NTB) customers on Credit Lines, to allow customers to migrate and be approved on an offering of their choice,
With time, Small Finance Banks (SFBs) and NBFCs, who have built robust underwriting capabilities over the years, should also be allowed to issue Credit Lines on UPI on their balance sheets,
Democratising controlled access of the Customer’s UPI transaction data to lenders may significantly improve their underwriting approval rate and accuracy for credit lines,
The lenders, to serve the needs of the sub-segments and to capture consumer surplus, should build for flexibility in payment terms, offering from EMIs, 45-day credit to, perhaps, even overnight credit as per customer use case.

I imagine there to be few areas more promising to watch out for. If you have any views or want to casually chat on the topic, drop me a message here. Until next time!

In case you feel your friends or family would be interested in reading about payments and lending, feel free to share the blog with them as well. Back again in a few weeks!

Unit Economics