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India is pushing banks and borrowers to make loans using its homegrown digital payments network, in an effort to reach one of the world’s largest populations underserved by credit.
The National Payments Corporation of India — which runs the Unified Payments Interface, the dominant payment system in the world’s most populous country — has started making its infrastructure available to banks to deliver short-term loans to small businesses such as vegetable vendors and food stall operators.
“We have a large uncatered market for credit,” NPCI chief executive Dilip Asbe told the Financial Times, adding it was also exploring the facilitation of investments and insurance. “UPI is now the infrastructure layer to provide the whole financial services business.”
UPI, which facilitates instant money transfers between bank accounts in India, has exploded in popularity since its launch in 2016 and now rivals Visa in terms of number of transactions, processing more than 600mn a day in July.
The system is part of the government’s India Stack, a set of digital tools that allows the country’s 1.4bn people to prove their identity, access benefits and make payments on their phone.
Bank account ownership has risen significantly in India to 89 per cent in 2024, from 53 per cent a decade earlier, according to the World Bank, partly driven by Prime Minister Narendra Modi’s push to transfer cash to the poor directly into their accounts starting in 2014.
However, 16 per cent of accounts are not active, compared with the 4 per cent average of other low- and middle-income economies. And while users have grown accustomed to using UPI for daily transactions and money transfers, its facilitation of credit remains limited, said Asbe.
Banks can now link credit lines, including loans backed by gold, property, fixed deposits, shares and mutual funds, to users’ UPI apps. From the end of August, the disbursed money can then be used for merchant payments, peer-to-peer transfers or cash withdrawals.
Because credit lines through UPI remain a relatively new product, many banks “will have to upgrade their platforms”, said Asbe. “We need investment by banks and fintechs to get more consumers and merchants on UPI.”
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However, many of the customers that it wants to attract are not natural drawers of formal credit and are more likely to borrow from friends and family, while wealthier UPI users and businesses already have established relationships with banks, said Neil Shah, co-founder of technology consultancy Counterpoint Research.
The World Bank estimated that only 15 per cent of India’s population borrowed formally last year, compared with the 24 per cent global average.
“If you don’t see that entity as a lending or a borrowing type institution then it definitely gives fewer opportunities for [UPI] to expand into those kinds of instruments,” said Shah. “It will take time for them, and the onus will also be on the banks to push that in terms of credibility.”
The ambitions also come as the country’s financial sector is recovering from a wave of delinquencies following a boom in unsecured retail lending. Loans surged more than 30 per cent year on year in 2023 before the Reserve Bank of India moved to curb activity.
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While UPI will provide the infrastructure through which banks offer loans, underwriting and assessing credit risk will be done by lenders. Asbe said he expected India’s regulators to “monitor that in a responsible manner”.
He added that banks that lend through UPI would benefit from a user’s “repayment history” on the platform and collection costs would be “close to zero” because of the NPCI’s automated clearinghouse and payment facilities.
The NPCI does not provide a breakdown of credit flowing through UPI and declined to provide details.
There has been some pushback against UPI, however. Several Indian states have in recent months started demanding that small vendors such as street-side fast-food and tea sellers, once cash-based businesses, provide UPI sales data as they try to bring them into the tax net.
Those moves sparked uproar, with many market vendors in cities such as southern Bengaluru now refusing to take UPI payments. Those small businesses will now “be thinking twice” before using the platform, said Shah.