UPI Credit: A No-Man's-Land For Lending In Digital India

While it's fast gaining acceptance, UPI credit also operates in a regulatory grey area.

A vendor uses a mobile phone to scan a QR code on a SIM card packet. (Photographer: Dhiraj Singh/Bloomberg)
A vendor uses a mobile phone to scan a QR code on a SIM card packet. (Photographer: Dhiraj Singh/Bloomberg)

Digital lending may be a boon for financial inclusion but it's also been a regulatory bane. The Reserve Bank of India is still struggling to weed out fraudulent loan apps. That task is only getting tougher.

Some fintech firms have been offering credit via Unified Payments Interface, allowing customers to borrow instantly by just scanning a QR code. While the facility is fast gaining acceptance, UPI credit operates in a regulatory grey area.

“UPI Credit is a term used colloquially in digital lending parlance, but there is no such product allowed by the regulator, and there are no regulations specific to it,” said Vivek Ramji Iyer, partner and national leader of financial services and risk advisory at Grant Thornton Bharat.

It is essentially a digital lending arrangement between a fintech firm and a non-banking financial company, bank, or any other regulated entity, according to Iyer. The fintech firm acts as a sourcing agent and a front-end for customers, while the actual lending happens from the balance sheet of the RBI-regulated lenders, he said.

UPI is managed by the National Payments Corporation of India— an umbrella entity set up by the RBI to enable digital payments and settlement systems in India.

The NPCI declined to comment on emailed queries. The RBI did not respond to BloombergQuint's queries.

The Overdraft Conundrum

UPI 2.0, launched in August 2018, allowed linking of overdraft accounts with the platform. That was seen a way to offer credit.

An NPCI official, speaking to BloombergQuint on the condition of anonymity, said that credit through UPI was “never allowed” unless a customer avails an overdraft facility on their savings or current bank account linked to UPI.

But most fintech firms that offer UPI credit as a service do not have any such requirement for customers. Senior executives at two UPI credit mobile applications— vCard and FlexPay—said that they launched their digital credit products in consultation with the NPCI. Offering UPI credit through an overdraft facility has not been a compulsion, one of them said.

Not many customers opted for linking their bank accounts with an overdraft facility under UPI 2.0, according to Parijat Garg, an independent consultant for digital lending and a former credit bureau official.

One of the reasons, he said, is that individuals who opt for short-term loans online find it difficult to avail them through an overdraft facility as they are also required by banks to pledge their overdraft loan against a collateral, such as a fixed deposit or their salary.

Moreover, borrowers who use UPI credit are new-to-credit or maintain low-balance accounts and may not even get an approval for an overdraft facility, Garg said. "The requirement of an overdraft account over a customer's savings or current account could also potentially slow the growth of fintech firms offering instant credit through UPI."

A Digital Credit Card

UPI credit is often marketed as a digital credit card or a 'scan now, pay later' option. An individual or a merchant can download the mobile application of an online loan service provider, furnish the required know-your-customer details, and use a pre-approved credit line instantly to make payments.

"A plastic credit card usually takes 15-20 days to arrive at a customer's doorstep after getting approved, but the same customer can use a UPI credit line within 15 minutes," said Vishal Ranjan, founder and chief executive of vCard, which markets itself as a mobile credit provider.

The company's mobile credit card product, launched in October 2019 in partnership with RBL Bank Ltd., offers a credit limit of up to Rs 5 lakh based on its customers' profile, with up to 50 interest-free days. The interest levied, thereafter, ranges between 18% and 42%.

vCard also offers a mobile credit line in partnership with Pinnacle Capital, an RBI-registered NBFC, and vCard's affiliate Virinchi Capital. It's offered for up to Rs 60,000 credit limit, and attracts a finance charge of Rs 1.15 per Rs 1,000 spent daily.

Both products are offered to salaried and self-employed individuals aged 23-55 years who are usually new to credit and have low incomes.

Another UPI credit provider, Vivifi India Finance Pvt., offers FlexPay, marketed as a 'digital credit card'. FlexPay allows users to avail a credit line of up to Rs 1 lakh for a monthly interest of up to 36% based on their credit profile.

"The interest is charged only for the time taken by the customer to pay dues, from the date of first transaction," said Anil Pinapala, co-founder and chief executive officer at Vivifi India. "If a customer pays off his credit due in the first week of the transaction, the interest levied would be lower than what it would be at the end of the billing period."

The company targets customers who are traditionally under-served and 70% of its customers have a monthly income below Rs 30,000.

The demand for UPI credit, said Pinapala, is rising rapidly. In 2020 when the company launched the product, it was getting 50,000 applications a month. That number now stands at 2 lakh, with only a fraction approved, he said without disclosing the approval rate.

Ranjan said vCard, too, has been conservative. "We get close to 1 lakh loan applications a month, but we only approve 2,000–3,000."

The share of small-ticket loan disbursals of up to Rs 25,000 has gone up among all kinds of personal loans to 60% in 2020 from 10% in 2017, data from a June 10 report by Transunion CIBIL and Google showed.

Nearly 70% of disbursals, the report said, happened outside tier 1 cities, with 78% of customers aged 25-45 years. About half of the new-to-credit retail borrowers were less than 30 years old.

Too Much Risk

In addition to the regulatory oversight, the UPI credit facility faces inherent risks. These include misreporting to credit bureaus, lack of proper KYC, and laxer credit underwriting standards.

One concern that is emerging is whether loans offered through UPI are being reported individually to the credit bureaus, or being pooled as unsecured personal loans by NBFCs, said Garg.

According to Iyer, in case such loans are pooled, terming them as overdraft facilities may help the regulator assess the risk better.

The other concern is whether full KYC norms are being followed diligently. An absence of such assessment carries a risk of money laundering or frauds because the end beneficiary is not fully known, said Garg.

Iyer listed a third concern. Many fintech firms offering lending services, he said, do not have adequate tie-ups with the RBI-regulated entities and often offer credit through their own balance sheets.

Some UPI credit firms allow conversion of dues into equated monthly instalments. "In some cases, the converted loan would be booked as a new loan and reported separately, which masks delinquencies on the lenders' books and the actual indebtedness of the borrowers as their earlier loans are showed as paid," Garg said.

The Way Forward

The RBI is in the process of reviewing the digital lending ecosystem after reports of malpractices surfaced last year. A report of a working group set up for this purpose is due shortly.

The regulator is looking to put the onus of monitoring digital lenders on banks and non-bank finance companies that work with these entities.

"For the regulator to genuinely form an opinion and guide NBFCs in the process, it needs to review all the existing tie-ups between regulated lenders and different payment operators," Iyer said.

Garg, however, cautioned against overregulation. While there is a need for finer checks and balances, he said, these should not come at the cost of hindering the financial inclusion goals of the regulator.