Borrowers on the other side will have easy access to credit with the convenience and security of UPI. This could be a game-changer for sectors such as micro-small and medium-sized enterprises (MSMEs), which contribute up to 30% of GDP, but often face a credit supply gap estimated at between 250 and 300 billion dollars.(3). UPI-based lending will make banks and NBFCs more efficient and provide much faster and cheaper credit to borrowers.
Opportunity to rethink product design
Banks and PSPs looking to monetize UPI payments and reduce the cost of disbursing credit will launch newer and more innovative revolving lines of credit based on UPI, instant overdrafts/EMI on savings accounts/ current and personal loan solutions for consumers. Pre-authorized working capital and bank overdraft lines of credit, enabled by UPI, can be used for business-to-business commerce. Payments with transaction limits. FinTechs focused on digital lending can potentially redesign the BNPL (Buy Now, Pay Later) product, unlocking the true value of the digital payment ecosystem.
As we move forward, new business models can be explored where FinTechs or UPI payment apps can be leveraged to source customers, facilitate transactions, generate bill payment reminders, and accept refunds. This will increase credit interoperability and FinTechs will be able to leverage UPI-based lending data to deliver enhanced services to users.
Build robust underwriting models
The digitization of the economy and the availability of data provide a more objective and comprehensive basis for credit assessment, thereby improving the quality of loans to individuals and businesses. This represents a substantial opportunity for the financial services sector, while meeting the credit needs of the diaspora and Indian businesses.
Underwriting such loan products will require lenders to mine UPI data, which can help build underwriting models using transaction parameters such as dips due to insufficient funds, merchant type (a jeweler is a riskier segment than a grocery store, for example), geographic location, to assess the creditworthiness of the borrower.
Also, with increased credit exposure to customers, lenders are more likely to review their credit portfolios to avoid defaults and keep NPAs (non-performing assets) within the allowed range. In the near future, this development is likely to be favorable to account aggregators, TSPs (technical service providers) and alternative data providers.
The path to follow
Over time, it will be clear how the economics will evolve for digital lending on UPI. The merchant discount rate (the transaction fees that merchants pay to accept digital payments) will be key to maintaining this trend, as will interest or recurring revenue (the interest rate that customers will pay for the loan ). For acquiring entities (those who display QR codes at merchants), it will also open up a revenue stream in the form of commissions from merchants to provide lending services and drive affordability. We may also see subsidy models, similar to those seen in the BNPL (Buy Now, Pay Later) ecosystem, emerge as a result.
The article was first published by ET BFSI.com How Recent UPI Changes Are Helping To Close India’s Credit Gaps.