Banks eye ‘Pay Later’ buzz as RBI clears UPI credit lines

Indian banks can hop onto the buy-now pay-later (BPNL) bandwagon, with the Reserve Bank of India’s latest instructions around credit lines on the Unified Payments Interface.

On Monday, the RBI instructed banks to open up pre-sanctioned credit lines through UPI-based transactions. The move will enable BNPL-type recurring small-value credit transactions for UPI users at merchant outlets.

While fintechs and NBFCs have dominated the BNPL segment, it is now a major opportunity for banks to tap into. As of now most banks offer instant EMIs on credit cards with some select banks offering it on debit cards too. But with a presanctioned credit limit, banks will be able to deliver an instant EMI offer to their customers. And it can be consumed via any UPI app.


“Most consumers take pre-approved personal loans directly into their bank accounts, there is a cost for that, but with the UPI being free that expense can be saved,” said a banker who leads payments at a private sector bank.

In a notification issued on September 4, the RBI asked banks to set up their own board-approved terms and conditions under which, with due customer consent, they can extend credit lines to be consumed via the UPI. Banks will decide the rate of interest, duration of credit and the credit line amount.

The move will enable a new funding source for UPI users. Currently they can use prepaid, savings, overdraft accounts and RuPay credit cards for UPI transactions.

Another senior banker who heads the payments business at a large private sector bank said with credit opening up on the UPI, the sector will see an instant boost of 30-40% in UPI transactions on top of the current volumes. It will help banks generate transactions as well as push up consumption of credit.

There are around 350 million consumers estimated to be paying via the UPI currently, compared with 35 million credit card customers. With credit enabled on UPI, the market opens up by ten times. “This gap will be bridged when underwriting models start using UPI data with variables like spend patterns, geo-location, merchant type and even declines due to insufficient funds to determine a borrower’s credit worthiness,” said Jitendra Gupta, founder, Jupiter, a neo-banking startup.

One of the bankers quoted above said the UPI will ease up disbursal of credit, but banks will have to be very careful around underwriting this customer, given collections will have to be done in the traditional method.

“No matter through which app disbursal happens, recovery will have to be done by the bank only, so eventually the bank will have to underwrite the customer carefully,” he added.