UPI Integration of Credit Lines Requires Active Engagement from Non-Banking Financial Companies

UPI: A Leap Forward in India's Payment System

The Unified Payments Interface (UPI) has taken the Indian payment system decades ahead of where it started, with NPCI reporting 145 billion transactions valued at over ₹220 trillion in FY2025 alone. This platform has transcended its origins as a peer-to-peer transfer rail to now become an infrastructure, as foundational to financial services delivery as branch networks were in the previous century.

The organic next step in this evolution is to assist with credit and linked payments. The Reserve Bank of India (RBI) recognised this in September 2023, when it enabled Credit Line on UPI (CLOU), permitting banks to extend pre-sanctioned credit lines through the UPI interface. The intent was to bring credit through a channel people already trusted for payments, leveraging the oversight advantages of a digital trail to advance its vision of ease and digitalisation in financial services.

Scale without direct participation of NBFCs is unlikely

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Two years have passed since CLOU's launch, and it needs more scale for credit. A critical issue is that while banks are permitted to offer credit lines on UPI, non-banking financial companies (NBFCs) remain excluded from direct participation. NBFCs are subject to comprehensive supervision by the RBI, following the same KYC norms, Fair Practices Code, credit bureau reporting obligations, and prudential guidelines on asset classification and provisioning. As per RBI data from June 2025, the Gross Non-Performing Asset (GNPA) of NBFCs stood at 3.08%, down from 3.30% in March 2025.

NBFCs cannot issue credit cards, but they can and do extend credit lines following processes that are, in substance, identical to those of banks. They serve segments such as rural borrowers, nano enterprises, women-led households, and MSME proprietors that commercial banks have not reached at scale.

CLOU addresses the end-use blind spot

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The RBI has flagged end-use monitoring of loans as a persistent concern, particularly for personal loans and unsecured credit. CLOU, by design, solves this problem. Under NPCI's 10th July 2025 directive, every transaction made through a credit line on UPI must align with the original loan purpose defined at the time of sanction. MCC-level controls allow lenders to restrict where credit is utilised.

The RBI has created a powerful end-use monitoring tool in India's credit history

The RBI has, in CLOU, created a powerful end-use monitoring tool in India's credit history. And then a category of lenders, NBFCs, that most urgently need that tool are waiting to be admitted. NBFCs, unlike banks, typically lack the transactional account relationship with borrowers that would provide natural spending visibility. CLOU would give them precisely that visibility, while simultaneously strengthening the RBI's own aggregate data on sectoral credit flows.

CLOU is no more than a tool

CLOU is a distribution upgrade, not a risk or a credit instrument; it does not change who underwrites credit, on what terms, with what collateral or credit assessment. All of that happens before a borrower links a credit line to UPI. CLOU just changes the delivery mechanism, from a bulk disbursement into a bank account to a purpose-linked, MCC-controlled, transaction-by-transaction utilisation.

Including regulated NBFCs in CLOU does not introduce new credit risk into the system

Including regulated NBFCs in CLOU does not introduce new credit risk into the system, but it does provide traceability, bureau reporting at the transaction level, and visibility that do not exist today.

Designing guardrails for NBFC participation in CLOU

In my opinion, the guardrails required for responsible NBFC participation in CLOU are not difficult to design. Board-approved MCC restriction policies, aligned with RBI guidelines and NPCI's operating framework, would define the universe of permissible merchant categories for each lender's product type.

Conclusion

The question is no longer whether NBFCs should be part of CLOU. The question is what specific guardrails, MCC restrictions, capital thresholds, and supervisory reporting requirements should govern that participation. That is a solvable policy design problem. This inclusion will open new frontiers for healthy competition, innovation, and potentially more regulated use cases. It also has the potential to drive more digital transactions and a broader digital ecosystem than withdrawing cash and spending without end-use monitoring.

UPI has 500 million users, and India has 111 million credit card holders. This gap, which some may think of as a market opportunity waiting for a fintech solution, I feel it is a financial inclusion deficit waiting for a green signal.

Piyush Singh is Founder of the CeDISI Partners LLP.