Credit on UPI: What Banks and NBFCs Need to Know

Over the past decade, UPI has transformed how India makes payments. Today, it is beginning to reshape how India borrows. With pre-sanctioned credit lines now operating on UPI rails-and regulatory frameworks evolving to support their safe usage-banks and NBFCs are facing both a compliance imperative and a significant product opportunity.

This blog outlines what financial institutions need to understand before building or scaling credit-on-UPI offerings.

Understanding Credit on UPI

A credit line on UPI is a pre-approved, revolving credit facility that allows customers to transact directly through UPI by drawing against a sanctioned limit instead of a savings account balance.

Unlike traditional loans:

• Funds are not disbursed upfront but are drawn at the point of transaction
• There is typically no fixed repayment schedule at the time of sanction; repayment structures (including EMI conversion) may be offered after utilization
• Credit utilization happens in real time during merchant payments and other permitted transactions

The available credit limit updates in real time as the borrower utilizes and repays the credit line.

This real-time, transaction-linked structure makes it fundamentally different from term loans or conventional overdrafts. It also requires lending systems to move beyond batch-based processing to real-time decisioning and orchestration.

Evolution of Credit on UPI

September 2023

The Reserve Bank of India (RBI) permitted scheduled commercial banks to offer pre-sanctioned credit lines through UPI. This expanded UPI beyond traditional instruments such as savings accounts, overdrafts, prepaid wallets, and RuPay credit cards.

December 2024

RBI extended the facility to Small Finance Banks (SFBs), enabling eligible SFBs to offer pre-sanctioned credit lines via UPI and further expand formal credit access.

July-August 2025

NPCI issued operational guidelines reinforcing:

• Board-approved policies governing credit usage
• Purpose-linked transaction validation
• Strengthened monitoring, compliance, and control frameworks
• Expansion of permissible use cases, subject to lender policies and regulatory compliance

September 2025

The Finance Industry Development Council (FIDC) requested the RBI to consider extending credit-on-UPI access to NBFCs through a phased approach for eligible entities.

Current Regulatory Position

RBI has consistently maintained that credit extended via UPI must comply with existing prudential lending norms, risk management practices, and supervisory expectations. NBFCs are not yet permitted to issue credit lines directly on UPI. However, they remain critical to the ecosystem as co-lenders, underwriting partners, and technology enablers.

Why Credit on UPI Matters

The opportunity for credit on UPI is driven by scale and reach.

UPI today processes billions of transactions every month, with transaction values running into multiple lakh crores-making it one of the largest real-time payment systems globally.

At the same time, formal credit penetration remains relatively low compared to UPI adoption. A large segment of digitally active users continues to have limited access to traditional credit products.

Credit on UPI aims to bridge this gap by leveraging an existing, trusted payments infrastructure to extend formal credit access-particularly to new-to-credit and underserved segments.

For financial institutions, this represents a significant opportunity to reach customers who are already embedded within the digital payments ecosystem.

What Banks Need to Prepare For

What Banks Need to Prepare For

1. Purpose-Linked Underwriting and Authorization

Each transaction must align with the declared purpose of the credit line. This requires:

• Accurate Merchant Category Code (MCC) mapping
• Real-time transaction validation systems

2. Board-Approved Usage Policies

Institutions must define clear, board-approved frameworks governing how credit lines can be used. Generic terms and conditions are not sufficient.

3. Standard Lending Norms

UPI-delivered credit must be:

• Rigorously underwritten
• Appropriately provisioned
• Continuously monitored

There is no regulatory relaxation based on the delivery channel.

4. Real-Time Limit Management

Credit availability must update instantly after each transaction, ensuring accurate balances for subsequent usage and preventing over-utilization.

What NBFCs Need to Know

For NBFCs, the focus is on preparedness and strategic positioning:

1. Current Regulatory Status

NBFCs are not currently permitted to directly issue credit lines on UPI. However, industry developments indicate that this may evolve over time.

2. Partnership-Driven Participation

NBFCs continue to play a critical role through:

• Co-lending partnerships
• Underwriting capabilities
• Capital provisioning

3. Technology Readiness

Traditional Loan Management Systems (LMS) are not designed for:

• Real-time credit utilization
• Transaction-triggered lending
• Purpose-based authorization

NBFCs must invest in modernizing systems to support these capabilities.

4. Regulatory Expectations

Any future framework is expected to place strong emphasis on:

• Governance and risk controls
• Capital adequacy
• Prevention of over-leverage and evergreening

Building the Right Infrastructure

Whether issuing today or preparing for future participation, financial institutions must build:

• Real-time credit limit orchestration
• MCC-based authorization systems
• Purpose-validation engines
• Board-governed policy frameworks
• Lending-grade risk monitoring at payments-scale volumes

This convergence of lending, payments, and core banking infrastructure represents a critical shift in how credit products are designed, delivered, and managed.