The Reserve Bank of India has issued an amendment circular to close a regulatory loophole that allowed banks to treat credit facilities delivered through the Unified Payments Interface differently from equivalent credit products offered through traditional channels. According to reports from The Economic Times, the central bank has mandated uniform prudential treatment for all credit facilities, including pre-sanctioned credit lines disbursed through UPI, irrespective of the payment mode, channel or underlying technology used for disbursement. As per Business Standard, the RBI stated that "notwithstanding the mode or channel of credit delivery or the type of payment instrument and/or underlying technology used for its disbursement, the prudential treatment of an underlying credit facility, including pre-sanctioned credit lines meant for payment transactions through UPI, shall be solely determined by the nature of the underlying credit facility, governed in terms of the applicable prudential norms."
Under the new directions, any credit facility linked to a specific payment instrument will be governed solely by the nature of the underlying credit. As reported by The Economic Times, a personal loan disbursed via UPI must be treated as a personal loan for capital adequacy, provisioning and NPA classification purposes, rather than attracting lighter regulatory treatment by virtue of flowing through a payment interface. According to Business Standard, the central bank has clarified that UPI-linked pre-sanctioned credit lines and payment-linked credit facilities will be subject to the same prudential norms as the underlying loan products, with the treatment depending solely on the nature of the underlying credit facility. Banks will also be required to include the terms and conditions of any payment-linked credit facility in their board-approved credit policy and ensure compliance with all applicable regulatory requirements.
The RBI has clarified that banks can only offer credit through UPI or any other payment mechanism if that type of credit is already permitted under existing regulations. According to The Economic Times, no new credit product can be introduced through the back door of a payment instrument. As per Business Standard, the central bank also clarified that only credit facilities otherwise permitted under existing regulations can be offered through such arrangements, meaning banks cannot introduce a new category of lending merely by routing it through a payment mechanism such as UPI. This move addresses a growing inconsistency where banks were classifying UPI-linked credit lines differently, with some treating them as overdrafts, others as personal loans and others as credit card equivalents, creating regulatory arbitrage that allowed certain lenders to circumvent capital and provisioning requirements.
The regulatory changes support broader financial inclusion objectives by ensuring uniform credit access across all channels. Digital payment systems, including UPI, mobile wallets, and QR code payments, have significantly increased financial accessibility for diverse population groups by providing convenient and secure methods for conducting financial transactions. As reported by The Economic Times, digital lending platforms and FinTech companies use alternative credit assessment methods and data analytics to evaluate creditworthiness, allowing underserved populations and small entrepreneurs to access financing more easily. Improved access to credit supports business development, income generation, and economic growth by empowering individuals and organizations to invest in education, healthcare, entrepreneurship, and productive activities.
