RBI allows SFBs to Extend Credit Line through UPI

7 Dec 2024

The Reserve Bank of India (RBI) has allowed small finance banks (SFBs) to provide pre-sanctioned credit lines through the Unified Payments Interface (UPI).

This step is expected to enhance financial inclusion and expand access to formal credit.

Previous Restrictions on UPI Credit Lines

Earlier, only scheduled commercial banks were allowed, and other banks such as Small finance banks (SFBs), payments banks, and regional rural banks(RRBs) were excluded from this facility.

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UPI

About UPI Credit Line

The UPI Credit Line is a financial product aimed at making access to credit easier.
Developed by : the National Payments Corporation of India (NPCI),
It aligns with the Reserve Bank of India’s vision to enhance credit accessibility.

Key Features of UPI Credit Line

Pre-Sanctioned Credit
- Banks provide pre-approved credit lines to individuals and small businesses.
- This credit can be used immediately for payments via UPI.
Easy Linking
- Users can link their credit lines to their UPI ID using their registered mobile number.
Secure Transactions
- Every transaction is protected with a dedicated UPI PIN for the credit line.
Multiple Payment Options
- Credit lines can be used to make payments to merchants via QR codes or for online shopping on e-commerce platforms.
Credit Insights
- Users can check their:
  - Credit line status
  - Utilized credit amount
  - EMI details directly in the UPI app.
Dispute Resolution
- Any issues can be resolved easily through the UPI Help (ODR) feature in the app.
Flexible Repayment
- Repayments can be done via:
  - Direct payments to the UPI ID linked to the credit line.
  - AutoPay (e-mandates) for automatic deductions, if applicable.

Benefits of UPI Credit Line

Instant Convenience : Provides instant credit for quick and seamless payments.
Boosts Financial Inclusion : Helps “new-to-credit” customers access formal credit systems.
Supports Economic Growth : Enables smooth transactions, promoting business growth and reducing barriers to credit access.

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What Are SFBs?

SFBs are specialized banks licensed by the RBI.
They cater to low-income individuals and underserved communities.
Offer services like microfinance, micro-enterprise loans, and other basic banking products.
SFBs receive scheduled bank status after meeting operational requirements as per Section 42 of the RBI Act, 1934.
Example: Capital Small Finance Bank, Ujjivan, Utkarsh etc

Objective of SFBs

Enhance Financial Inclusion:
- Provide savings options to unserved and underserved sections of society.
- Offer credit to:
  - Small business units
  - Small and marginal farmers
  - Micro and small industries
  - Other entities in the unorganised sector
- Operate using high-tech and low-cost models.

Key Features of SFBs

Registration:
- Registered as a public limited company under the Companies Act, 2013.
Licensing:
- Licensed under Section 22 of the Banking Regulation Act, 1949.
Capital Requirement:
- Minimum paid-up voting equity capital of ₹200 crore is required.
- For SFBs converted from Urban Cooperative Banks, the capital requirement may differ.
Priority Sector Lending (PSL) Norms:
- SFBs must allocate 75% of their Adjusted Net Bank Credit (ANBC) to priority sectors as defined by the RBI.

The guidelines for small finance banks provide inter-alia that

Promoters: Promoters can include resident individuals or professionals with at least 10 years of experience in banking and finance.
- Companies controlled by such individuals are also eligible.
Focus area: Primarily offer basic banking services.
Regulatory compliance: SFB must follow all norms and regulations applicable to commercial banks.
It comprises maintaining ratios
- Cash Reserve Ratio (CRR).
- Statutory Liquidity Ratio (SLR)

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RBI allows SFBs to Extend Credit Line through UPI

Previous Restrictions on UPI Credit Lines