Private banks are preparing to target new-to-bank customers for credit on UPI against fixed deposits as collateral. Despite the National Payments Corporation of India (NPCI) not yet launching the credit-line-on-UPI service, banks are actively working on their structures to facilitate this service.
Lending Against Deposits
Lending against deposits is considered a cost-efficient method for banks to provide loans compared to credit cards. This approach requires a minimum value of transactions for banks to break even, according to two senior bank officials who chose to remain anonymous.
Small-Ticket Loans for New Customers
Banks are focusing on ‘new to bank’ customers by offering small-ticket loans against fixed deposits (FDs) to those without a credit history. In the April-June quarter this year, loans against FDs amounted to ₹1,294 crores, compared to a contraction of ₹797 crores in the same period last year, as per the Reserve Bank of India (RBI) data. Banks are cautious about giving credit to customers without a credit history and have been directing such customers to non-bank finance companies (NBFCs) to establish their credit history through small-ticket loans.
Strategy and Potential Upgrades
Madan Sabnavis, Chief Economist at Bank of Baroda, explained that if this strategy proves successful, banks might eventually offer these customers 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.
Merchant Base and Cost Efficiency
With an extensive merchant base already enabled on UPI and a substantial acquiring market, issuing banks are looking to scale this product. Mohit Bedi, CEO of Kiwi, a payments fintech, highlighted that the network cost is only one-sixth of the credit card infrastructure. For banks, this method is very cost-effective as the overhead cost is low and there is no plastic involved.
Partnerships and Distribution
Some banks may partner with NBFCs or fintechs to distribute this product. While the underwriting of such loans will be done by banks, the distribution can be managed by a fintech or NBFC partner, who typically have a better reach, according to sources.
Future Prospects for NBFCs and Fintechs
Currently, only banks can provide credit via UPI. However, NBFCs and fintechs are keen to get authorized to offer this service as well. Despite NBFCs’ eagerness to enter this space, some banks are lobbying against it, as reported by officials from the fintech industry.
