Credit for UPI: These are its features and advantages

 Credit for UPI: These are its features and advantages

One may stop carrying numerous credit cards if their UPI app has a credit line. It would be interesting to watch if the banks provide reward points and other perks usually provided to credit card members.

The creation of a pre-approved, collateral-free credit line or borrowing limit that a customer may get from his bank through the UPI platform was announced by RBI governor Shaktikanta Das in April.

You will soon have access to a credit line on the Unified Payments Interface (UPI), which will be useful if your savings account runs out of gas at the end of the month. It is a pre-approved credit limit that clients may use at the moment of purchase.

The National Payments Corporation of India (NPCI) demonstrated how this would function to the audience in September at the Global Fintech Festival (GFF). A limited number of customers on payment applications including Bharat Interface for Money (BHIM), PayZapp, Paytm, and GPay are being tested for this functionality by Axis Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Punjab National Bank (PNB), and the State Bank of India (SBI), among others. In the next months, the service will be made available to a wider range of consumers, according to the institutions Moneycontrol talked with.

Incorporating credit lines within UPI's scope is "yet another remarkable feature added to UPI," claims Mandar Agashe, founder and managing director of fintech company Sarvatra Technologies. He continues by saying that up to this point, credit cards, prepaid wallets, savings and overdraft accounts, could all be connected to UPI. This innovation will completely redefine the game by putting credit lines associated with UPI and credit cards on a same footing.

In April, Reserve Bank of India (also known as governor Shaktikanta Das revealed the introduction of a collateral-free, pre-approved credit line, or obtaining limit, that a user could take advantage of from his bank via the UPI platform.

How it operates

Each UPI account is connected to a bank savings account. Users must make a formal application to their bank in order to obtain the credit line on the UPI service. The borrower's financial details, including eligibility, income, credit score, and repayment history, will next be evaluated by the banks. You could be required to provide supporting documentation, including income statements, identification verification, residence proof, and other pertinent information, depending on the bank's criteria. Various banking institutions may have different processes and conditions for requesting a UPI credit line. The application and related documentation will be examined by the bank. If the application is accepted, the bank will inform the applicant of the conditions and the authorized credit limit.

According to Virat Diwanji, corporate president and head, consumer banking, Kotak Mahindra Bank, "Once the bank approves the pre-determined spending limit, which is similar with the borrowing limit of a credit card, one can utilize it as one wants." He continues by saying that, similar to how credit card payments operate, payback and any related interest may be handled at a later time.

According to Parag Rao, country head of HDFC Bank for payments, consumer finance, technology, marketing digital banking, "Being an accessible platform, UPI users will be able to use the credit accessible through UPI across multiple payment apps."

"When using a credit card, the UPI apps you use will be linked to your credit line and exhibit the debits in your loan account instead of what is in your bank account," explains Rahul Jain, CFO, NTT DATA Payment Services, India.

Interest rates and duration 

A UPI credit line's duration might range from a few months to many years. "Banks may offer opportunities for short-term credit lines or more stable credit lines, allowing borrowers to elect the period of repayment that suits their needs," explains Diwanji.

The bank, the borrower's creditworthiness, and the state of the market may all affect the interest rate on the credit line. These interest rates are sometimes less expensive than credit card interest rates, making them a reasonably affordable method of obtaining credit. According to Diwanji, banks may provide fixed or variable interest rates.

advantages for users

The necessity to carry several credit cards is eliminated for individuals who are confident managing their credit by integrating a credit line with their UPI app. It would be fascinating to observe if banks provide clients who apply for credit lines via UPI with reward points and other perks generally provided to credit card holders. Because the merchant discount rate (MDR) does not apply to credit line customers, the rewards rate may not be greater. The charge that merchants provide to a business that handles credit card payments is known as the MDR.

"If someone does not have a debit or credit card but still wants a credit facility while making settlements, s/he can simply avail of credit of a financial institution first, and then link the money in the loan account to UPI," advises Agashe.

At the time of the transaction, users may utilize the credit and turn it into equated monthly installments (EMIs). "New-to-credit (NTC) customers may create their credit score over time," claims Rao.

Diwanji adds, "However, as with credit everywhere options, it's critical to use the credit line on UPI wisely, ensuring an accurate comprehension of the repayment terms."

Going overboard with credit via UPI might put you in a financial trap much as with credit cards. Utilize credit wisely.