India’s financial inclusion will soon add another successful case study. This time, the second iteration of India’s financial inclusion program is poised to connect millions of businesses and billions of individuals to quick-lending services thanks to the Unified Payments Interface (UPI). And the impact of this second iteration would be more impactful than previous banking innovations such as automated teller machines (ATMs), the ubiquitous quick response (QR) code, or the ability to transfer money by simply keying in a ten-digit mobile phone number.
Last month, RBI, during the course of the monetary policy committee announcement on interest rates, said that pre-sanctioned credit line would be made available via UPI. With this, a pre-sanctioned approval acts as a digital credit-card to millions who may not have one. In an age of buy now-pay later, RBI’s recent measure helps create a win-win situation for all – MSMEs, individuals as well as banks.
The recent announcement is best explained as an opportunity for a bank or financial institution to extend credit to a UPI-holder. At 85 million as of March 2023, the number of active credit cards in India does seem like a big number. However, card penetration in India, according to the World Bank, is a mere 5%. Countries such as Canada and Israel have nearly 80% of their population possessing a credit card. Moreover, a credit card sign-up involves a tedious sales process that explains the feeble penetration. Between February and March 2023, India added 2 million credit cards.
On the contrary, there were 256 million UPI codes, excluding Bharat QR codes. Between February and March 2023, India added 6 million UPI codes. The simplicity and ease of utilising UPI could be reasons why banks such as Punjab National Bank, Union Bank of India, Indian Bank, Canara Bank and HDFC Bank have already started offering credit cards on UPI.
For banks, implementing a credit on UPI comes at a fraction of the cost of what they would otherwise spend on the credit card mechanism. There is a likelihood of reduction in underwriting costs, efforts and time besides significant flexibility and usage options to end-customers. A pre-sanctioned credit line is safer compared to schemes such as buy-now, pay-later, since a bank has already evaluated the risks ahead of sanctioning a credit line.
RBI’s newest financial model could also unlock opportunities for the MSME and micro-MSME sector. Over 60 million MSMEs operate on a turnover of up to Rs5 crore a year. When it comes to micro-MSMEs, an acute pinch is felt while raising working capital to meet requirements such as production, exports, vendor payments, or to managing the daily show. Working capital loans are not only challenging for a professional to seek given the stringent documentation, but does involve latencies in transmission of funds. Thanks to UPI, banks could institutionalise a process that could offer a pre-sanctioned loan in under a day or even an hour.
On the retail side, the new process enables merchants access to customer credit card like limits without the cost of merchant point-of-sale (POS) machines. This will also bring down the cost of transactions since the merchant discount rates can be lowered or eliminated. This will also benefit customers since they can access a wider range of merchants and retail outlets, even those which do not have POS machines.
Given the sheer volume of UPI transactions, more banks could join the fray in offering a credit card. Then there is also the hope that networks such as MasterCard and Visa could join and offer much desired interoperability, besides helping contribute to a healthy credit uptake in the country. With the simplicity that UPI offers to banks and the ability to acquire vast numbers, this could very well be the start of Financial Inclusion 2.0. And yet another case study for the world to follow.