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How UPI could revolutionise consumer credit in India

Depending on whom you ask, consumer credit in India is either growing too rapidly or not trickling down fast enough. Bankers speak with awe of the industry’s phenomenal expansion, which is so fast-paced that the regulator is starting to get concerned. Fintech players like to draw attention to its lopsided distribution. The industry keeps chasing a fraction of affluent urban professionals to the exclusion of everyone else. Broaden access, they say, and the scorching growth may become more sustainable.

For lenders, however, the problem with adding new borrowers is the incremental cost. The economics of even modest democratization — to a wider section of regular wage earners, for instance in factory townships — makes the concept a nonstarter.

Take credit cards, of which there are nearly 100 million in circulation. It’s a small number for a country of 1.4 billion people, but double from five years ago, underscoring significant expansion. And yet, it’s the same group of 40 million well-heeled Indians who keep getting more cards. Fewer than 13% of Indians over 15 years of age borrow from formal sources, including credit cards. In China, the number is nearly 40%, thanks to a multiyear boom in digital lending before a regulatory crackdown on Ant Group Co. and Tencent Holdings Ltd., the two major players.

During the pandemic, India saw an invasion of sorts by predatory Chinese lending apps, but the regulators have chased them away. Out of more than 60 banks in India, about 75% of the entire credit-card franchise by value is with just four — HDFC Bank Ltd., State Bank of India, ICICI Bank Ltd., and Axis Bank Ltd. The reason more lenders aren’t interested in getting into the business or expanding it is that the cost of acquiring and servicing customers works out to about 6,000 rupees ($70) per client, including specialized software for collection and risk management. It isn’t possible to recoup this expense from the spending of someone earning, say, 40,000 rupees a month, middle of the range for what an outsourcing company typically pays fresh coding talent.


But what if there was a way? Not with expensive credit-card architecture, but by employing India’s ubiquitous smartphone-based payment protocol that logged more than 100 billion transactions last year.

Unified Payments Interface is used by 300 million Indians to instantly settle bills. Even the smallest of shopkeepers accept UPI payments. Alphabet Inc.’s Google recommended its open architecture to the Federal Reserve as a template for FedNow, the new interbank settlement service that launched in the US last year. So far, though, UPI users have only spent money they already have on deposit with banks. But now lenders have been cleared by the regulator to offer credit. Any person scanning QR codes at more than 50 million merchants will have the option of paying from a credit line, if she happens to have one.

That still leaves banks with the original problem: How do they know if modest earners can handle unsecured loans, especially if they have limited credit history? “When you go below incomes of 100,000 rupees a month, the quality of financial services starts dropping meaningfully,” says Piyush Bagaria, a co-founder at SalarySe. It’s a fintech startup connecting with large employers’ human-resource databases so that employees who want revolving credit can consent to sharing their authentic wage data and employment history with lenders. After that they will use the SalarySe app to pay merchants over UPI from an approved credit line. “The line will be settled from next month’s salary,” Bagaria said.


Banks will garner an interchange fee from merchants, though they will only earn interest when customers opt to settle in monthly installments. Bypassing card networks will reduce the lenders’ cost of acquiring and servicing lower-income consumers. Knowing that repayments will be automatically collected out of a regular salary will give them comfort. They could offer credit lines anywhere from 0.7 times for those trying to build a credit history to up to three times monthly income for more mature clients. Credit risk will become more manageable. SalarySe, which recently raised $5.25 million from investors including Peak XV’s Surge platform and Pravega Ventures, has set itself an ambitious goal of bringing credit to 10 million salaried Indians in three years.

This is just one of many models that will emerge over the coming months. After all, the whole intention behind UPI as a public utility is to foster experimentation in an open marketplace, where small startups have as much of a shot at success as large players. And Big Tech is already sensing the potential. Google Pay, which has a one-third share of money that moves on the payment protocol, has tied up with banks that want to offer credit lines. In early trials, Google has said that half of such loans went to people earning less than 30,000 rupees, and that a vast majority of these credit customers are from smaller towns.

Consumer loans in India are on a tear. More recently, Paytm, the homegrown fintech pioneer, has pulled back from the buy-now-pay-later craze by slowing third-party bank loans on its online network by 4% in a quarter. Even then, the year-on-year growth rate is 56%. For the sake of financial stability, the Reserve Bank of India is trying to quieten things down by increasing risk weights and forcing banks to bring in more loss-absorbing capital.

But even as it grows, credit can still become safer if UPI spreads access to a wider group of borrowers and draws in more lenders.

The payment utility is already moving $2.2 trillion annually as people settle daily transactions with money they have earned. Letting middle-class households spend a part of next month’s wage over the network might help them deal better with shocks. For six out of 10 Indians, raising emergency funds from any source would be very difficult, if not impossible. With broader access to credit, private consumption, which is expanding 3 percentage points slower than the economy’s overall 7%-plus growth rate, could become more stable. Income gaps would still remain acute, but consumption inequalities could reduce a little.

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