By Sasmit Patra & Rameesh Kailasam
Over the past decade, India’s digital public infrastructure (DPI) has fundamentally reshaped the architecture of finance. At the centre of this transformation lies the National Payments Corporation of India’s Unified Payments Interface (UPI), regulated by the Reserve Bank of India (RBI). What began in 2016 as a seamless, real-time payments rail has today evolved into the backbone of India’s digital retail economy.
The next phase in this evolution is the integration of credit. In 2023, the RBI permitted the introduction of Credit Line on UPI (CLOU), enabling banks to extend pre-sanctioned credit through UPI applications. This marked an important step, effectively allowing users to access short-term credit through the same interface they use for routine payments. Yet, there is huge promise and scope to expand this. While banks are permitted to offer credit lines on UPI, non-banking financial companies (NBFCs), despite being deeply embedded in India’s credit ecosystem, remain excluded from direct participation.
Over the past decade, NBFCs have emerged as critical drivers of retail lending, micro, small, and medium enterprise (MSME) financing, and last-mile credit delivery. Many have built specialised underwriting models, leveraged alternative data and digital tools to assess thin-file borrowers, and expanded credit access to segments historically underserved by traditional banking channels. In several segments, particularly unsecured retail lending and MSME credit, NBFCs have grown faster than banks. Their capital adequacy ratios remain comfortably above regulatory thresholds, and the RBI’s scale-based regulatory framework has introduced enhanced supervision, governance standards, and prudential alignment with the broader financial system. In this context, the exclusion of NBFCs from UPI-linked credit means that there is huge and untapped potential that can transform the economy through ease of access to credit.
The practical potential of UPI-linked credit becomes clearer when viewed through the lens of everyday financial behaviour. Consider a user who receives a pre-sanctioned credit limit—say Rs 50,000 from a lender—and has that limit linked directly to their UPI ID. When making routine payments—buying inventory for a small shop, paying utility bills, covering travel costs, or managing household expenses—the user could choose to draw from this credit line instead of their bank balance. Over the course of a billing cycle, multiple small transactions would accumulate against the sanctioned limit, with repayment occurring at the end of the month or through flexible installments.
For millions of individuals and small businesses accustomed to transacting through UPI, such a model integrates short-term liquidity seamlessly into everyday financial activity. Small merchants, gig-economy workers, and first-time borrowers often interact daily with UPI as a payments interface while relying on NBFCs for access to short-term credit. Currently, the only argument against inclusion of NBFCs is prudential risk and one may argue that NBFCs do not enjoy the same liquidity backstops as banks. At the same time, the structural evolution of NBFC funding suggests a sector that is gradually becoming less dependent on bank intermediation than it once was.
RBI data also indicates that banks’ exposure as a share of NBFC borrowings has moderated, while market-based funding through instruments such as non-convertible debentures and commercial paper has grown steadily. Conceptualising UPI-linked credit as a broader digital credit interface—rather than merely an extension of conventional bank lending—opens the possibility of developing innovative products embedded directly within the UPI ecosystem.
The policy conversation around this issue is also beginning to attract academic attention. The National Law School of India University, Bangalore, has recently undertaken a research study titled “Digital Lending Ecosystem: A Case for Inclusion of NBFCs in Credit Line on UPI”, examining the evolution of UPI as a form of DPI and exploring the policy considerations surrounding the current exclusion of NBFCs from the CLOU framework.
India stands at an important moment in the evolution of its digital financial architecture. The country’s DPI has succeeded largely because it has remained interoperable, scalable, and responsive to the changing needs of users and institutions alike. As credit becomes more deeply integrated into this infrastructure, the way participation is structured will play a significant role in shaping the next phase of India’s digital finance story.
The Union Budget 2026 has already acknowledged the importance of this evolving landscape. The announcement of a high-level committee on Banking for Viksit Bharat reflects a broader recognition that India’s financial architecture is entering a new phase, one in which non-bank financial institutions, digital infrastructure, and innovative credit models will play an increasingly central role.
By integrating NBFCs into the CLOU framework, India can transform a payments success story into a credit inclusion success as well. We have perfected the flow of money, now let’s perfect the flow of opportunity.
The authors are, respectively, Rajya Sabha MP and member, Supreme Court Bar Association, & CEO of Indiatech.org
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.