India has started to push banks and borrowers to make loans using with local digital payments network in an effort to widen access to credit for underserved communities.
The National Payments Corporation of India (NPCI) made its infrastructure available to banks to offer short-term loans to SMEs such as vegetable vendors and food stall operators. The NPCI mentioned that the country has a large unattended market for credit, and its mission is to offer its Unified Payments Interface (UPI) to improve the situation.
Benefits and risks for UPI
UPI facilitates instant money transfers between bank accounts in India, rivalling Visa in terms of transaction numbers. Please use the sharing tools found via the share button at the top or side of articles. The system is part of the government’s India Stack, a range of digital tools that allows Indians to prove their identity, access benefits, and make payments on their phone.
The number of bank account owners rose significantly in the country to89% in 2024, according to the World Bank, as part of an initiative to transfer cash to lower-class individuals directly into their accounts. Yet, 16% of accounts are inactive, compared with the 4% average of other low- and middle-income economies.
While users are used to utilising UPI daily, its facilitation of credit remained limited. However, with the new initiative, banks can link credit lines such as loans backed by gold, property, deposits, shares, and mutual funds to users’ UPI apps. From the end of August, the disbursed money can then be used for merchant payments, P2P transfers or cash withdrawals. As part of the transition, banks will have to update their platforms.
A challenge in implementing this capability consists of the fact that only 15% of India’s population borrowed formally in 2025, as the customers NPCI wants to appeal to usually reach out to friends and family for funds. While UPI will deliver the infrastructure through which banks offer loans, underwriting and assessing credit risk will be done by lenders. India’s regulators are expected to monitor this activity responsibly. NPCI mentioned that banks that lend through UPI benefit from a user’s repayment history on the platform, and collection costs would be significantly low thanks to NPCI’s automated clearinghouse and payment facilities.
There is some pushback against UPI as several Indian states demand that SMEs offer UPI sales data as they try to bring them into the tax net. This sparked uproar, with many market vendors in cities such as Bengaluru refusing to take UPI payments.
