You could soon avail UPI loans against your fixed deposits
What's the story
Private banks in India are considering a new strategy to extend credit on the Unified Payments Interface (UPI) using fixed deposits (FDs) as collateral. This initiative is primarily aimed at customers who are new to banking services. The development comes even as the National Payments Corporation of India (NPCI) is yet to launch a credit-line-on-UPI service, indicating that banks have already begun preparing their structures for this potential offering.
Strategy details
Lending against FDs: A cost-efficient method
Lending against FDs is seen as a cost-effective way to provide loans, requiring a minimal transaction value for banks to break even. This approach is particularly beneficial for customers without a credit history. According to Reserve Bank of India (RBI) data, loans against FDs reached ₹1,294 crore in the April-June quarter this year, marking a significant increase from the same period last year.
Customer strategy
Banks' approach to new customers and credit extension
Traditionally, banks have been reluctant to extend credit to new customers without a credit history. Instead, they have often directed them toward non-bank finance companies (NBFCs) for small ticket loans. Madan Sabnavis, chief economist at Bank of Baroda, stated that if this strategy proves successful, banks may offer these customers a credit card and potentially upgrade them to personal or auto loans in the future.
UPI benefits
UPI lending: A cost-effective solution for banks
Banks are eager to capitalize on their robust merchant base on UPI and the extensive acquiring market. Mohit Bedi, CEO of Kiwi, a payments fintech company, highlighted that the network cost is one-sixth of the credit card infrastructure. "For banks, this is very cost-effective as the overhead cost is low and there is no plastic involved," he said. This makes UPI lending an attractive option for financial institutions.
Potential partnerships
Banks may partner with NBFCs, fintech firms for loan distribution
Some banks are considering partnerships with NBFCs or fintech companies for distributing these loans. While the underwriting of these loans will be handled by the banks themselves, distribution could be managed by a fintech or NBFC partner due to their wider reach. Currently, only banks have the authority to extend credit line via UPI. However, NBFCs and fintech companies are also showing interest in obtaining this authorization.