RBI Allows SFBs to Offer Credit via UPI

In a major step towards expanding digital credit access, the Reserve Bank of India (RBI) has permitted Small Finance Banks (SFBs) to offer pre-sanctioned credit lines through the Unified Payments Interface (UPI). This move is expected to enhance financial inclusion by making credit more accessible, especially for individuals and small businesses who have limited exposure to formal banking systems.

The RBI’s decision aligns with its broader push to integrate credit into digital payment systems, ensuring seamless and instant availability of funds for users. The expansion is set to benefit millions of customers in rural and semi-urban areas who rely on SFBs for financial services.

How Has UPI’s Role in Credit Evolved?

The UPI platform, launched in 2016, initially served as a real-time payments system for transferring funds between banks. Over time, its scope has widened, allowing merchants, businesses, and consumers to use it for various financial transactions.

In September 2023, the RBI introduced a key reform by allowing Scheduled Commercial Banks (SCBs) to link pre-sanctioned credit lines to UPI. This enabled customers to use their approved credit limits for transactions without needing separate loan approvals. However, SFBs, Payments Banks, and Regional Rural Banks (RRBs) were excluded from this facility at the time.

With the latest approval, SFBs can now extend pre-approved credit via UPI, further integrating credit access into India’s rapidly growing digital payments ecosystem.

Why Is RBI’s Move Significant for Small Finance Banks?

Small Finance Banks play a crucial role in catering to underserved segments, including low-income groups, small businesses, and first-time borrowers. Unlike larger banks, they have a deep presence in semi-urban and rural areas, where traditional credit access remains limited.

By allowing SFBs to offer credit lines through UPI, the RBI has created new opportunities for small businesses and individuals to access quick and hassle-free credit. This move is expected to:

• Enable customers to use digital credit without the need for collateral.
• Reduce the cost of credit disbursement, making loans more affordable.
• Encourage financial discipline, as borrowers can access funds as needed instead of taking bulk loans.

According to RBI sources, this expansion will help formalize credit access for a vast segment of people who are new to borrowing, bringing them into the mainstream banking system.

What Does This Mean for India’s Digital Banking Future?

The integration of credit with UPI is set to transform India’s digital banking landscape. With more banks, including SFBs, offering pre-sanctioned credit lines, the financial ecosystem will become more inclusive and efficient.

Looking ahead, the RBI is expected to release detailed operational guidelines for SFBs to ensure smooth implementation. The move is also likely to encourage fintech companies and digital lenders to partner with SFBs, further accelerating digital credit adoption.

As India moves towards a cashless economy, the ability to access credit instantly via UPI will play a pivotal role in empowering individuals and businesses, driving economic growth and financial empowerment.

Summary of the news