Understanding Pre-sanctioned Credit Line through UPI and its Working Process

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The Reserve Bank of India (RBI) Governor Shaktikanta Das made a major announcement on April 6th, unveiling a new feature where users of the Unified Payments Interface (UPI) could avail a pre-sanctioned credit line through banks. This feature will allow users to access money from a bank-approved line of credit with UPI.

To get a better understanding of what a pre-approved credit line is and how it can be accessed through UPI, let us explain it in greater detail.

A credit line, different from a loan, is a funding facility where one can borrow money in a flexible and revolving manner from a lender. It’s a predetermined amount set by the lender that the borrower can avail of anytime.

A credit line can be availed through various systems such as credit cards, small credit lines, business credit lines and now, through UPI. Typically, interest rates are higher when availing a line of credit rather than a traditional loan.

Here is a look at the process of obtaining a credit line through UPI:

Before getting funds through UPI, borrowers must first get a sanctioned line of credit from a bank. This usually involves the lender evaluating the personal financial background of the borrower such as income, borrowing history, credit score and so on, to determine the credit line amount.

In addition to the pre-approved line of credit via UPI, Das also mentioned that linking RuPay credit cards to UPI, would further encourage innovation. “UPI’s robustness has been leveraged to develop new products and features from time to time. This will encourage innovation,” he said.

However, in March 2023, the National Payments Corporation of India (NPCI) issued a circular that suggested the introduction of a prepaid payment instrument (PPI) charge for merchant transactions carried out on UPI. This additional fee is 1.1 % of the amount above Rs 2,000 merchant receives through PPIs. This fee only applies if the customer is paying with one company wallet but the receiver is using a different company wallet.

As of now, there are no charges incurred while making bank-to-bank account UPI transactions.

The pre-sanctioned credit line facility is a measure taken by the RBI in response to the current challenges posed by the pandemic. Such a feature would pave the way for more borrowers to access funds and make things more convenient.

The company mentioned in this article is the National Payments Corporation of India (NPCI). It is an umbrella organisation regulated by the RBI that looks after all retail payments in India. NPCI provides digital payment services for both government and public and is the largest provider of such services in India. The organisation operates the UPI, RuPay and the National Electronic Funds Transfer (NEFT) systems.

The person mentioned in this article is Shaktikanta Das, the Governor of the Reserve Bank of India (RBI). He is a former bureaucrat from the Indian Administrative Services and has held many key posts in the Indian Government. He is also a member of the Monetary Policy Committee in India and oversees all the monetary policies of the central bank. He has a Masters Degree in Economics from the Delhi School of Economics, along with various diplomas in economics and banking.