How do you make UPI payments? 3 broad ways.
- Link bank account to a UPI app: Your account gets debited, and the merchant/peer account gets credited. You can only spend the money in your account.
- Link RuPay credit card to a UPI app: Not Visa, not Mastercard. Only Rupay card. You get credit for UPI payments.
- Link wallet to a UPI app: This is a relatively new development. Read this brilliant twitter thread for better understanding.
Coming soon: You will be able to make UPI payments from a pre-sanctioned credit line. Think of an overdraft facility. This replicates what you do with a credit card. Purchase products/services on credit.
Yes, you can make UPI payments on credit using a RuPay credit card too but not many people own credit cards. The banks don’t give credit cards so easily since it is an unsecured facility. However, the banks should not have many issues in offering a secured credit line to its customers.
Let’s see what the RBI has said and how this move is useful to the customers.
What Has the RBI Said?
Here’s the Statement of Development and Regulatory practices dated April 6, 2023 issued by RBI after the monetary policy meet. The Reserve Bank will issue detailed instructions in this regard separately.
Hence, just like you make UPI payments from your bank account, you will soon be able to make UPI payment through a pre-sanctioned credit line.
A pre-sanctioned credit line is predefined credit limit offered by the bank to the customer. The customer can use as and when needed until the limit is hit. And the customer pays interest on the utilized amount. An overdraft facility is an example of pre-sanctioned credit line.
Who Funds the UPI Payments from a Credit Line?
When credit is involved, the lender must be compensated for the amount lent.
Until now, UPI transactions were through direct debit from your bank account. Hence, there was no credit involved. Yes, there would be operational costs in facilitating UPI payments, but the low-cost savings/current account balance/float should more than make up for it.
In this case, there is credit involved. Some one must bear the cost.
Credit cards offer credit. No cost to you if you pay on time but the banks/payment network recover the cost from the merchant in the form of Merchant Discount rate (MDR). RBI does not permit zero-interest rate loans. Hence, if you look deep down into any credit product (No-cost EMI, BNPL), there is some one bearing the cost of credit. It could be the retailer, the merchant, the brand, or you. There is no credit without interest.
Who Will Bear the Cost for UPI Payments from a Credit Line?
In the simplest case where the user (borrower) bears the interest cost for the credit, there is no problem. The lender gets compensated by the interest paid by the borrower.
In a credit product where the user (borrower) does not have to bear the interest cost, the burden must fall upon the merchant, who must share a percentage of the transaction with the banks as Merchant discount rate (MDR). Clearly, the merchants who are used to zero-cost UPI payments wouldn’t welcome such UPI transactions with open arms.
It is possible that the merchants may be given an option to access UPI payments from a credit line (just like they have been given in case of UPI payments through wallets).
We will have to wait for more clarity on this topic.
Why Would You Sign up for Such a Facility?
If the user must bear the cost of credit, why would you make UPI payments from a credit line and incur additional cost? After all, a credit card offers you interest-free credit for a few weeks.
Many reasons.
#1 You May Not Own a Credit Card
It is not easy to get a credit card. However, anyone can get a secured overdraft facility against a bank fixed deposit. The banks don’t carry much risk in these secured products and the interest rate is also quite low.
Let’s say you have a bank fixed deposit of Rs 2 lacs. You can request your bank to offer you a secured overdraft facility against this bank Fixed deposit. Since this is a secured facility, this interest rate is usually a couple of percentage points over the bank fixed deposit interest rate.
So, if your bank fixed deposit is at 7% p.a., your OD facility interest rate would be 9% p.a. And this interest is charged on the utilized amount (not on the sanctioned amount). Not bad.
#2 Not All Establishments Accept Credit Cards
UPI is ubiquitous. Can’t say the same for a credit card. If an establishment does not accept credit cards, how do you make payments on credit?
This proposal about UPI payments from a credit line could be the answer.
#3 UPI against a Credit Line Could Be a Massive Improvement over Credit Card EMIs
Banks charge 13-15% p.a. on credit card EMI transactions.
On a secured overdraft facility, the interest rate will be much lower. Say, about 8-10% p.a.
Over and above, overdraft products offer greater flexibility compared to conventional loan products. Unlike a regular loan, an overdraft is no concept of tenure. You pay the interest on the outstanding amount until you pay off the amount. It is a revolving credit facility. You can pay off whenever you want.
In fact, you can also park your short-term funds in the overdraft account to reduce your interest liability. For instance, you used your Overdraft account for a payment of Rs 50,000 last week. You have Rs 30,000 in your account for the next 5 days. You can transfer this money to an Overdraft account and for those 5 days, you will be charged interest on Rs 20,000 (Rs 50,000-Rs 30,000) for those 5 days.
In credit card EMIs, there is a penalty for closing the loan before the agreed tenure. No such problems with an overdraft facility.
Do Remember This
I have focused only on secured overdraft products. The security of a bank fixed deposit helps reduce interest rates. The banks also offer unsecured overdraft facility. However, the interest rate for such facilities is no different from credit card loans. The interest rate for an unsecured overdraft facility would range from 16% p.a. to 18% p.a. In that case, the low cost benefit of an overdraft facility against credit card EMIs will go away.
A credit line can be in the form of a loan (just like Buy Now, Pay Later) or any other form of credit innovation, where the user gets the interest-free credit period. Essentially a possibility that the user does not pay for the credit facility. In all such cases, the cost will be borne by the merchant. The merchants won’t like this a bit. We need to see how much that cost will be and whether it will be optional for merchants to accept such UPI credit transactions.
UPI payments are not just between customers and merchants. It is also used for peer-to-peer transfer. As I understand, you won’t be able to use UPI (for payments from a credit line) for P2P payments. Would be allowed only for merchant transactions.
In my opinion, this is a brilliant move. This will mimic credit card payments. An alternative to credit cards. With the massive penetration that UPI has, this will help deepen consumer credit. The success depends on how the entire ecosystem (banks, customers, merchants) warms up to the cost of credit. How much and who bears it?
The drawbacks: Credit cards offer reward points, cashbacks, and discounts. How? Because they get a cut when you make a payment. This income can be used to fund such benefits to the customers. However, UPI has been zero cost since the beginning. Thus, it is not easy to put a heavy burden on the merchant. The users, if they do, won’t pay beyond the interest amount. Hence, you shouldn’t expect attractive discounts/offers when you make UPI payments from a credit line.