The Reserve Bank of India has moved to close a regulatory loophole that allowed banks to treat credit facilities delivered through the Unified Payments Interface differently from equivalent credit products offered through traditional channels, issuing an amendment circular that firmly establishes the principle that the nature of credit — not the technology used to deliver it — determines how it must be regulated.
The central bank has mandated uniform prudential treatment for all credit facilities, including pre-sanctioned credit lines disbursed through UPI, irrespective of the payment mode, channel or underlying technology used for disbursement.
What Changes
Under the new directions, any credit facility linked to a specific payment instrument will be governed solely by the nature of the underlying credit — meaning a personal loan disbursed via UPI must be treated as a personal loan for capital adequacy, provisioning and NPA classification purposes, rather than attracting lighter regulatory treatment by virtue of flowing through a payment interface. Banks will also be required to include the terms and conditions of any payment-linked credit facility in their board-approved credit policy and ensure compliance with all applicable regulatory requirements.
Critically, the RBI has also clarified that banks can only offer credit through UPI or any other payment mechanism if that type of credit is already permitted under existing regulations. No new credit product can be introduced through the back door of a payment instrument.
Why It Matters
The circular addresses a growing inconsistency in how banks were classifying UPI-linked credit lines — with some treating them as overdrafts, others as personal loans and others as credit card equivalents — creating regulatory arbitrage that allowed certain lenders to circumvent the capital and provisioning requirements applicable to equivalent non-UPI credit products.The RBI had first permitted banks to offer pre-sanctioned credit lines through UPI in September 2023 — a move that opened the door for a new class of Buy Now Pay Later-type products delivered seamlessly through the UPI interface. While the facility expanded credit access and deepened the utility of UPI beyond pure payments, the absence of uniform prudential treatment created a growing inconsistency across banks.
The Broader Implication
The circular reinforces a principle the RBI has been asserting with increasing firmness across its recent regulatory actions — that technological innovation in financial services cannot be used to sidestep the substance of regulation. As fintech-bank partnerships increasingly use payment rails to deliver credit products at scale, the central bank is drawing a clear line: the pipe through which credit flows does not change the nature of the credit itself.The move is also consistent with the RBI’s broader push for activity-based regulation — where the same activity attracts the same regulatory treatment regardless of the entity or technology involved. For banks that have been aggressively building UPI-linked credit products as a lower-cost alternative to credit cards, the circular signals that the regulatory free ride is over.
