FinTales Issue 33: Credit Lines on UPI and SROs

If, like me, you are reeling from the frenzy of the Global Fintech Festival (GFF) held in Mumbai this month, I hope you’ve had some much-needed downtime after the event.

The event itself was a show of strength. An ode to the sector’s vitality and resilience. The stats on the GFF are pretty impressive too: delegates from over 100+ countries, 300+ exhibitors, 900 speakers from 30+ countries and 300+ investors participated in it. Last year, 25,000 people attended the 2022 edition of the festival. This year, more than 65,000 people were in attendance. The event’s sheer size reminded me of the auto-expo at Pragati Maidan, Delhi. Only the auto industry is a century old, while fintech has been around for approximately 15 years.  

The festival was also like a reassuring campfire in the middle of a particularly cold winter for start-ups. Funding for the start-up sector dropped from $11.9 billion last year to a chilly $2.8 billion in the first quarter of this year. The event was a statement to investors – a sort of ‘best is yet to come’ for fintech in India.

I remember when the RBI Governor, Shaktikanta Das, walked into a packed auditorium at the festival – he couldn’t help but appreciate the energy. He also used the stage to emphasize the need for self-regulation, signalling a maturing industry. Lots more about self-regulation in fintech, in our main course story.

Now onto our FinTales menu for the month.

Main Course: meaty stories about how credit lines on UPI can enable financial inclusion, and the benefits of self-regulation for the fintech industry.  

Dessert: news about new UPI products launched at the GFF.

Mints: a refresher about recent fintech developments.

Main Course

Credit lines on UPI: A financial inclusion enabler

Earlier this month, RBI allowed linking of bank-sanctioned credit lines to UPI, which was a long standing industry demand. Before we get into the details, here’s some quick context.

UPI is a part of India Stack – India’s digital public infrastructure (DPI). India Stack is a collection of different technologies and frameworks which enables delivery of digital services to Indian consumers. Apart from UPI, it comprises of Aadhaar, Digilocker, and Account Aggregators. DPIs are viewed as a means to advance financial inclusion objective globally. While other countries are still catching up, India is miles ahead in its DPI efforts. Take UPI for example. Now an archetype for fast payment systems of several countries, UPI has democratized access to digital payments for Indians. This has resulted in delivery of financial services to last mile customers. The World Bank’s report on ‘Advancing Financial Inclusion through DPI’, released during the G20 Summit, also validates India’s DPI success.

“In just six years, India has achieved a remarkable 80% financial inclusion rate – a feat that would have taken nearly five decades without a digital public infrastructure approach,” remarked her Majesty Queen Máxima of the Netherlands, in the World Bank report. Innovative products built on top of DPI have been a key contributor to this. ‘Credit lines on UPI’ is another such product. Now, let’s get to its workings.

Through a credit line, banks give you access to a pool of funds on-demand (up to a specific limit). You must repay what you spend (from the limit) within a stipulated period. You don’t need to draw on the entire credit line all at once – you can borrow in small instalments (until the limit is exhausted). Interest on credit line will accrue only on the actual outstanding amount (not on the entire credit line). Until now, users could only link UPI with their current/savings account (CASA), overdraft (OD) account linked to CASA, wallets, or RuPay credit cards. Out of these, CASA and wallets are both deposit accounts. While ODs and RuPay credit cards give users access to credit. ODs on UPI transactions never gained much traction because NPCI imposed an interchange fee of 1.5 % on it. Acquiring banks recovered this amount from merchants by levying a fee called merchant discount rate. This disincentivised merchants from accepting UPI transactions through ODs. So, because of the low acceptance rates, many banks stopped offering ODs on UPI.

Now, with linking of UPI to credit lines, users can make UPI payments by directly drawing on the credit line sanctioned by banks. Banks will decide the terms for usage of the credit line, like the credit limit, interest rate, and credit period. The facility can be accessed through all UPI apps (like Google Pay, Paytm, etc.). For instance, if you have a pre-approved credit line of Rs. 40,000 from HDFC Bank, you can link it to your GPay UPI account. You can then borrow money from the credit line to make UPI payments (through GPay) at a grocery store, to buy your bucket-listed iPhone, or pay your utility bills.

Credit on UPI is not a new proposition. But ‘credit lines’ on UPI is. It can promote financial inclusion more effectively (when compared to ODs or RuPay credit cards on UPI). The RBI has outlined 3 broad factors to measure financial inclusion – access, usage, and quality (of financial services). And credit lines on UPI can deliver on all 3 fronts.

First, credit lines on UPI will ease access to credit even for those without credit cards. To recap, Last year, NPCI had enabled linking of RuPay credit cards to UPI. But it’s impact in terms of easing access to credit remains limited. Because credit card penetration in India is low – less than 5% Indians have a credit card. So, only a small portion of the population can reap its benefits. On the other hand, credit lines on UPI don’t have this drawback because securing a credit line is easier than obtaining a credit card. Banks too can leverage the UPI network to extend credit lines to customers and increase credit consumption. So, credit lines on UPI can deliver bespoke credit enabled payment products at quicker rates, even for small-ticket purchases (of individuals and businesses).  

Second, UPI is, by far, the most effective way to distribute financial products. As per a report, UPI helped in cost savings of $12.6 billion and added $16.4 billion to the Indian economy in 2021. UPI enables frictionless payments at minimal costs. Further, the acceptance infrastructure for UPI is also much wider compared to other digital payment methods. For example, there are 119 million UPI QR codes in India compared to 5 million PoS machines. UPI can also benefit borrowers in some other ways. For instance, presently, the market for UPI is concentrated. So, to attract more customers and ensure stickiness (to UPI apps), market players incentivise usage (through cashbacks and discounts). Together, these factors, make a good case for wider usage of credit lines on UPI service.

Despite the benefits underlined above, we still have some reservations. Currently, RBI has not enabled this facility for credit lines extended by NBFCs. Whereas, BNPL products targeted at new-to-credit and thin-file customers often involve a credit line issued by an NBFCs (not a bank). Therefore, to enable financial inclusion at scale, RBI must also consider linking NBFC-sanctioned credit lines to UPI in the future. Also, we’re also yet to see how the implementation of this facility pans out. For instance, a high interchange fee for credit lines on UPI may dampen the deal (just like it did for ODs on UPI). While the implementation of the feature is underway, we hope that RBI and NPCI also keep these issues in consideration.

Create, innovate… and self-regulate

Over the years, self-regulation has gained significant prominence in the tech-policy space. Whether you develop generative AI models or offer dating apps, lawmakers would like you to self-regulate. The Indian fintech industry is no exception to the trend. This month, the RBI governor, while speaking at the Global Fintech Fest, urged fintechs to form self-regulatory organizations (SROs). He also promised RBI’s full support and engagement to achieve this.

The push for the SROs is justified. SROs, in many industries, have worked for the greater good of the industry that they manage and regulate. For instance, the Association of Mutual Funds of India (AMFI), a SEBI-registered SRO for the mutual funds industry, plays an instrumental role in the growth and development of mutual funds in the country. It has also helped make the mutual fund industry more transparent and accountable. In the fintech space, Australian Payments Network (AusPayNet),a 30-years-old SRO for the Australian payments industry has made noteworthy contributions. For instance, in 2022, the AusPayNet, following rapid growth in the use of QR codes for payments, prescribed voluntary guidelines for its use. It also plays an active role in fraud prevention. It has devised a fraud mitigation framework for Card Not Present transactions, which reduced fraud by 17.7% in 2019 (when compared to 2018).

These are some specific ways in which the SROs can benefit the fintech industry.

First, an SRO has representations from diverse sections of the industry. It is, therefore, closely aware of the industry realities and best practices. Accordingly, an SRO is well-positioned to help regulators frame more balanced and enabling regulations. SROs can also help regulators collect inputs on a prospective regulation from a larger section of the industry.

Second, in many cases, the fintech products operate in a regulatory void. The regulatory framework for them is either absent or unclear. An SRO can fill these temporary vacuums by prescribing best practices for its members. For instance, SROs can prescribe specific codes of conduct for data security and privacy, while the Indian financial sector laws evolve and codify these norms.

Self-regulation can, therefore, help fintech players adopt a proactive approach to regulation and course-correct before RBI’s intervention. This can solidify the confidence of regulators in the industry’s activities. The regulator, as a result, may prescribe light-touch, instead of prescriptive regulations. For instance, the Indian digital lending industry, to begin with, neither had an SRO, nor a specific regulatory framework. As the industry grew, reports of misconduct of a few rogue lenders surfaced, which led to an intense regulatory scrutiny. The RBI, eventually, prescribed a digital lending framework – with a high bar for compliance­. As opposed to this, the payment aggregation industry self-regulated itself on several aspects such as voluntary compliance with stringent merchant onboarding norms. This helped the payment aggregation industry achieve the twin objective of securing customer trust and regulatory confidence. This is evident from the fact that RBI did not receive any major complaints with respect to entities undertaking payment aggregation activities between 2009-2019. Therefore, even when the regulator, in 2020, decided that the industry was mature enough to be regulated directly (through the Payment Aggregator guidelines), it adopted a light-touch approach.

Third, SROs can boost the regulator’s supervisory powers by detecting and reporting non-compliance. Their support is necessary to ensure that RBI’s enforcement capability is not compromised as fintech market grows at an accelerated pace. They can cast a wider net (than regulators) and weed-out bad actors before they cause substantial harm to the industry. They can also issue warnings to non-compliant industry players, asking them to ensure compliance to avoid adverse actions.

Fourth, SRO can promote responsible innovation. For instance, an SRO has members with expertise spanning domains like cyber-security, data privacy, legal advisory and fraud prevention. By leveraging this expertise, members can design legally compliant and secure products/services. Also, a fintech can, through SROs, seek the regulator’s view on the guardrails for an innovative financial product before it designs it. This way, fintechs can proactively comply with the regulatory expectations – even before the business model becomes regulated.

After the Governor’s speech, the RBI has reportedly sped up SRO formation process. The industries bodies like the Payment Council of IndiaFACE and DLAI are in talks with RBI to be recognized as SROs. The DLAI has already proposed codes of conduct for its prospective member, for when it starts its operation as an SRO. While the progress is promising, it is equally important to calibrate the proposed SRO framework as per the evolving fintech market. For instance, even unregulated players such as UPI app providers (like GPay and PhonePe) and other technology service providers must have a representation with the SRO. This is because they play a critical role in the digital payment ecosystem. UPI apps are key to distribution of UPI services, and other tech-players support regulated entities in both customer-facing functions and payment processing. Without their representation, the SRO cannot function cohesively with the industry. SROs in other jurisdictions, like AusPayNet, also have unregulated entities as their members.

In sum, SROs hold significant potential to enable effective policy making and implementation and promote responsible innovation in the fintech industry. So, the sooner they become operational, the better it is for the future of the industry.


Up above the world so high, brand new gleaming UPI

The GFF was glazed with the launch of different innovative products, but UPI shined the most. RBI and NPCI launched these new UPI-based products and features at the GFF:

(a) UPI LITE XUPI LITE is an instrument which lets users make low-value payments in an offline mode. The new UPI LITE X feature will now enable users to both send and receive payments (in offline mode). The feature can be accessed on mobile phones that support near field communication (NFC). Earlier in August, RBI also increased the upper limit for UPI LITE payments from Rs. 200 to Rs. 500.

(b) UPI Tap & Pay:With this feature, users can make UPI payments by simply tapping on NFC-enabled QR codes, at point of sale (PoS) machines (similar to how users tap and pay with cards).

(c) Conversational Payments:RBI has launched these voice-enabled UPI and bill payment features:

  • Hello UPI: Users can make UPI payments by giving voice commands (in Hindi and English) to transfer funds, and entering the UPI PIN. These payments can be initiated through UPI apps, phone calls, or IoT devices (like Alexa).
  • BillPay Connect: Users can make bill payments by giving voice commands on their smart home devices (like Alexa). Additionally, BillPay Connect also has a feature to pay bills by sending a message or giving a missed call (on the prescribed number). On giving missed calls, users will receive a callback for payment authorization.

(d) UPI-enabled ATMs: NPCI has launched UPI-enabled ATM called ‘Hitachi Money Spot UPI ATM’ in partnership with Hitachi Payment Services. The ATMs will enable users to withdraw cash by scanning QR codes (at the ATM machine) through any UPI app. 

(e) UPI AutoPay through QR:Users can scan merchant QR codes to activate UPI autopay services for recurring payments. 


RBI releases guidelines for penal charges on loans

The RBI has released guidelines on ‘Penal Charges on Loans’ for regulated lenders (like banks and NBFCs). They prescribe that lenders must not add penal interest to the contracted rate of interest – they can only impose a penal charge on a standalone basis (like a flat fee). Also, they specify that lenders must not capitalize penalties, meaning they cannot charge interest on unpaid penalty. Prior to the guidelines, lenders had the flexibility to determine penal charges, provided they were fair and transparent. The RBI stepped in because it discovered during regulatory audits that some lenders levied excessive penalties on borrowers for extra revenue.

RBI kickstarts pilot project for a public tech platform

The RBI has commenced a pilot project for a ‘public tech platform’ that will enable frictionless delivery of digital loans. The Reserve Bank Innovation Hub is developing it. The platform will collate data points for borrower’s credit evaluation from different data sources and platforms. It will be built on an open architecture with open-source APIs. Any financial sector entity can seamlessly plug-in their app with the platform (through the API), and access the data stored on it. By acting as a single source of data, the public tech platform will streamline the digital lending process. It will also reduce operational costs and turnaround time for loan disbursements.

PayPal challenges classification as a PSO

PayPal has filed an appeal challenging Delhi High Court’s previous ruling that categorized it as a ‘payment system operator’ (PSO) under India’s anti-money laundering laws. In its appeal, Paypal has argued that the order classifying it as a PSO must be reconsidered. The ground for the appeal is that the Delhi HC has recently held that GPay, a third-party app provider, is not a PSO. And that Paypal also offers technology services like GPay, and does not enable transfer of funds.

NPCI launches a blockchain tool

The NPCI has launched Falcon, an open-source project which aims to simplify blockchain deployment for payment solutions. It relies on ‘Hyperledger Fabric‘, which serves as a foundation for creating blockchain-based products and solutions. The solution intends to provide an environment to developers for creation of network and Web3 solutions. 

Pine Labs launches a mini PoS

Pine Labs has launched ‘Mini’ – a cost-effective PoS device that accepts both QR-based and card-based payments. The NFC-enabled device also enables tap-to-pay card transactions. Targeted at small merchants, it is offered at nearly a third of the cost of a regular PoS terminal. This launch comes amid heightened competition in the PoS market, with companies like Paytm and PhonePe expanding their merchant payment solutions.

A quick fintech refresher

Our fintech team members – Aparajita Srivastava, Astha Srivastava and Radhika Maheshwari – wrote for the Global Legal Insights (2023) on the ‘Fintech Landscape in India’. You can access the chapter here.

Image credits: Shutterstock

That’s it from us. We’d love to hear from you. Write to us at to chat with our team about all things fintech regulation and policy.

See you next month.

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