Private banks are planning to target new-to-bank customers with credit on UPI using fixed deposits (FDs) as collateral. Although NPCI has not yet launched the credit-line-on-UPI service, banks are preparing their framework for the same.
Lending Against Deposits
Lending against deposits is a cost-effective way for banks compared to issuing credit cards. This requires a minimum transaction value for banks to break even, say two senior bank officials who didn’t wish to be named.
Small Loans for New Customers
Banks are targeting new customers with small-ticket loans against FDs, especially those without a credit history. Data from RBI shows that in Apr-Jun quarter this year, loans against FDs were ₹1,294 crores compared to ₹797 crores in the same period last year. Banks are cautious of lending to customers without a credit history and are directing such customers to non-bank finance companies (NBFCs) to help them build a credit history through small-ticket loans.
Strategy and Upgrades
Madan Sabnavis, Chief Economist at Bank of Baroda, said if this works, banks can offer credit cards to these customers later. “If that works we can upgrade them to personal loans, auto loans and more. This is a good way to differentiate between good and bad customers,” he added.
Merchant Base and Cost Efficiency
With a large merchant base already enabled on UPI and a big acquiring market, issuing banks are looking to scale this product. Mohit Bedi, CEO of Kiwi, a payments fintech, said 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 no plastic is involved.
Partnerships and Distribution
Some banks may partner with NBFCs or fintech companies to distribute this product. While the underwriting of such loans will be done by banks, the distribution can be done by a fintech or NBFC partner who has a larger reach, say sources.
Future for NBFCs and Fintechs
Only banks can offer credit on UPI currently. But NBFCs and fintechs are keen to get authorized to offer this service as well. Though they are eager, some banks are opposing it, say fintech officials.
