Can NPCI’s new UPI credit line be an alternative for entry level credit cards?

The National Payments Corporation of India’s (NPCI) ‘Pre-sanctioned Credit Line at Banks through UPI (Unified Payments Interface)’ would work more like a credit card without the plastic card actually in place. The credit line allows individuals and businesses to access pre-sanctioned credit lines or loans from banks that are linked to their UPI accounts. This means that customers can avail low-ticket retail loans from banks, which can be used for regular payments just like credit cards.

Axis Bank, HDFC Bank, ICICI Bank, Indian Bank and Punjab National Bank have already activated their credit lines for customers while BHIM, Google Pay, Paytm, PayZapp and Navi apps have also gone live for the credit line, according to NPCI.

Customers will be able to use this credit limit to make payments to online and offline merchants and there will be no need to pay from their bank balances. At the end of the statement cycle, they will have to clear all their dues within the specified timeframe, just like in the case of credit cards. Banks will assign a credit limit to customers on their UPI and the amount of credit will be based on income, credit score, transactions and repayments history.

Banks do not charge any transaction fee for using the credit line on UPIs now. They however levy credit disbursement and documentation charges. The credit line can be used only for the merchant UPI ID payments and not for payments to any P2P (Peer-to-Peer) UPI transactions. Banks are also quite wary about high-risk transactions. For instance, Axis Bank does not allow the credit line to be utilised for gold purchases, bitcoin trading and stock market trading through apps.

While one version of the product would work exactly like the credit card by offering an interest free period for repayments, banks are also offering credit lines in the form of overdrafts in regular bank accounts and against FDs (fixed deposits). Axis Bank offers FD based credit line on UPIs and plans to launch unsecured variants of credit lines soon.

Customers can link credit lines as funding accounts on UPI just like savings accounts, overdraft accounts, prepaid wallets and credit cards. The credit line allows customers to make payments only to merchants’ QR Codes and e-commerce merchants on UPI. Standard UPI transaction limits will be applicable for transactions. So will the new credit line be able to challenge credit cards, especially the entry level ones?

Experts who track credit cards and the payments space think it is possible. “It’s going to be a low-cost product for merchants as MDR (merchant discount rate or merchant charges) on UPI based credit lines are expected to be much lower than conventional credit cards,” SpendWisely, an online platform that helps people to use their money smartly, posted on X (formerly Twitter).

Credit cards have a MDR of 2%-3% of the transaction amount and hence are more profitable. Since the UPI credit lines do not have any charges now, customers will find it more attractive, especially for small ticket transactions. “It (credit line on UPIs) might disrupt entry-level cards but surely merchants will also prefer the same and might stop accepting CCs (credit cards) due to high MDR,” a user posted on X.

“In case, it would actually disrupt the credit card market, most likely, the target is going to be the low-end entry level cards. Mid and high-end credit cards and lifestyle credit cards will continue to dominate in their respective customer base,” SpendWisely said.

“Since the customer is going to use UPI available real-time in which the customer is always connected, the banks can start from the low-ticket credit lines and go higher up based on consumer behaviour and repayment patterns,” NPCI said in its product overview on the credit line.

“Leveraging advanced technologies such as data analytics and artificial intelligence, banks can identify credit line opportunities for customers and merchants engaged in significant UPI-based digital payments,” NPCI stated.

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.