UPI succeeded because it expanded access while protecting trust. Credit on UPI will face the same test, but with higher stakes. Its success will depend on how participation evolves and whether the framework is able to support a wider range of use cases and borrower segments, writes Ranjeet Rane
l What is credit line on UPI
CREDIT LINE ON UPI, or CLOU, allows a UPI transaction to draw from a pre-sanctioned credit line instead of a bank account balance/ pre-existing credit card. From the user’s perspective, the payment experience remains unchanged—the user scans a QR code or initiates a UPI payment as usual, but the source of funds is credit rather than savings, or a credit card. At the point of payment, the credit line is drawn down and the transaction amount is settled directly to the beneficiary’s bank account. This differs from credit cards on UPI, which involve linking a RuPay credit card to the UPI interface.
In September 2023, CLOU was permitted for scheduled commercial banks, and in December 2024 to small finance banks (SFBs). At the same time, NBFCs have played a significant role in expanding credit to underserved segments supported by improving asset quality, stronger capital and liquidity standards. As India moves towards democratising credit on UPI—such as expanding access, deepening credit markets, and leveraging UPI’s network effects—these are likely to be shaped by how participation evolves over time and whether the framework is able to support a wider range of use cases and borrower segments.
l How this can help small businesses access working capital
CLOU HAS THE potential to change how small businesses and the self-employed access short-term credit. Many of them already rely on UPI for daily transactions such as collections, supplier payments, and wages. Embedding credit into this payment flow allows a pre-sanctioned credit line to be accessed instantly through a familiar interface, rather than through a separate loan application process. NBFCs play a significant role in lending to small businesses, gig workers, and borrowers with thin or informal credit histories by using alternative data for strong under-writing and an innovative technology stack to reach the last-mile customer. Aside from credit availability, CLOU will also shape which borrower segments can access it, the kinds of innovations that scale with it, and the role embedded credit plays in everyday economic activity.
l The risks in embedding credit into UPI
EMBEDDING CREDIT INTO UPI increases certain risks across the system such as over-borrowing, as frequent, small-ticket credit usage can accumulate quickly. However, alternative data and stronger underwriting practices today allow credit decisions to be linked more closely to transaction behaviour and cash-flow patterns. In the context of CLOU, the ability to track usage at the point of payment can support monitoring of end-use, repayment behaviour, and exposure across multiple credit lines.
There are also consumer protection concerns. In embedded credit, the payment app is often the primary interface, while the lender operates in the background, which can create confusion around loan terms, repayments and grievance redressal. Also, since funding structures and risk profiles vary across banks, SFBs and NBFCs, regulators have taken a phased approach focused on safeguards and system stability.
l Why a calibrated approach is ideal
IF THE GOAL is to widen access without weakening trust, a sensible route is a phased entry model. This would be a controlled pilot where only NBFCs that meet specific conditions can participate, with focus on suitability rather than size. Suitability can mean a combination of financial health, governance readiness, and operational capability. Eligibility could be tied to asset quality, profitability track record, compliance history, and internal risk controls.
There can be portfolio level caps, so only a limited share of an NBFC’s lending book can flow through CLOU in the initial phase. Performance triggers, where rising defaults or complaint volumes automatically slow down or pause growth would be ideal. There can be transaction level controls, such as restricting usage to certain merchant categories and limiting repeated draws in short periods. There can also be stronger disclosure rules so users understand that they are borrowing, not spending their own balance.
l Key parameters for evaluation
ON CREDIT OUTCOMES, regulators would want to see repayment behaviour, delinquency patterns and whether usage aligns with intended small-ticket use rather than becoming a channel for rolling over distress. On system outcomes, they would want to see fraud rates, dispute resolution performance, complaint volumes, merchant acceptance patterns, and whether disclosures and customer communication are clear enough for low literacy users.
UPI succeeded because it expanded access while protecting trust. Credit on UPI will face the same test, but with higher stakes. The route forward goes beyond the binary choices of innovation and stability, and should be seen as a design choice. This would mean defining the suitability, enforcing guardrails, running longer pilots and expanding in measured steps. This would ensure that everyday credit can evolve on the UPI rail without weakening the reliability that made UPI the default way India pays.
The writer is partner, The Dialogue, a research and public policy think-tank
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.