Private banks are likely to target new-to-bank customers for credit on UPI against fixed deposits as collateral. Although the National Payments Corporation of India (NPCI) is yet to launch credit-line-on-UPI service, banks have begun working on their structures.
Lending against deposits is seen as a cost-efficient way to provide loans against credit cards requiring minimum value of transactions for banks to break even, said two senior bank officials who did not wish to be named.
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As banks tap into the ‘new to bank’ customers, small-ticket loans may be given against collaterals such as FDs to customers without a credit history. Loans against FDs stood at 1,294 crores in the April-June quarter this year, as against a contraction of 797 crore in the same period last year, according to data from the Reserve Bank of India (RBI). Banks are apprehensive giving credit to new customers without credit history. To overcome this, they have often directed the new customers to non-bank finance companies (NBFCs) to avail small ticket loans, so that their credit history is established.
According to Madan Sabnavis, chief economist at Bank of Baroda, if this strategy works well, banks may sell them a credit card. “If that works, we can upgrade them to a personal loan, auto loan and more. This is a good strategy to differentiate between good and bad customers,” he added.
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With a strong merchant base already enabled on UPI and a huge acquiring market, issuing banks are looking to operate the product at scale.
“The network cost is 1/6th of the credit card infrastructure. For banks, this is very cost-effective as the overhead cost is low and there is no plastic involved,” said Mohit Bedi, CEO of Kiwi, a payments fintech. Some banks may partner with NBFCs or fintechs for the distribution of this product.
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“The underwriting of such loans will be done by banks, as these loans will reflect on the banks’ books. But the distribution can be done via a fintech or NBFC partner as they have better reach,” sources said.
As of now, only banks can give credit via UPI, but NBFCs and fintechs are intent to get authorised for this as well. While NBFCs are keen to enter this space, some banks are lobbying against it, officials from the fintech industry said.
