Whalesbook
UPI's Credit Feature Faces Roadblocks
India's Unified Payments Interface (UPI) has transformed digital payments, processing an estimated 24,162 crore transactions worth ₹314 lakh crore in FY2025-26. However, its expansion into a credit distribution channel is facing major obstacles. The Reserve Bank of India's (RBI) Credit Line on UPI (CLOU) initiative, designed to broaden credit access via the popular platform, has gained ground among banks and was extended to Small Finance Banks (SFBs) in early 2025. Yet, Non-Banking Financial Companies (NBFCs), a key part of India's financial system, are currently excluded. This leaves them sidelined, limiting the initiative's full impact.
NBFCs Meet Regulatory Standards
NBFCs adhere to stringent regulatory oversight from the RBI, including Know Your Customer (KYC) norms, Fair Practices Codes, credit bureau reporting, and prudential guidelines, matching those for banks. Data from March 2025 shows NBFCs had a Gross Non-Performing Asset (GNPA) ratio of 3.08%. These companies are vital for serving credit-unserved and underserved populations, such as rural borrowers, nano enterprises, and MSMEs, often reaching groups commercial banks have not served widely. Their exclusion from CLOU overlooks their important role in lending.
CLOU Enhances Loan Tracking
CLOU directly addresses the RBI's focus on tracking loan usage, especially for unsecured credit. By linking transactions to specific purposes and using Merchant Category Code (MCC) controls, CLOU enables real-time monitoring of how funds are used. This improves credit risk assessment and supports product innovation. This capability is valuable for NBFCs, which may not have the same level of transactional account visibility as banks. Their inclusion would offer this insight and enhance the RBI's overall data on credit flows without introducing new risks.
Rapid Growth in Digital Credit
India's digital payments market is growing rapidly. Person-to-Merchant (P2M) transactions reached ₹111.8 trillion in FY2025, a 37% compound annual growth rate since FY2020. UPI alone handled about 22,000 crore transactions in 2025, averaging nearly 60 crore daily. The consumer credit market is also expanding, expected to reach USD 91.88 billion by 2033. Digital lending platforms are growing quickly, making up an estimated 2.5% of retail loans in FY24 and projected to reach 5% by FY28. However, excluding NBFCs from CLOU limits this ecosystem's full potential. NBFCs' credit growth outpaced banks in FY2025, at 20% compared to 12% for banks, showing their strong momentum.
Exclusion Creates Regulatory Disconnect
The ongoing exclusion of NBFCs from CLOU is a missed opportunity and a potential weakness in India's digital credit strategy. CLOU is a distribution improvement, not a risk tool, but its limited access prevents key lenders from using its transparency and tracking features. This policy, possibly a cautious start in 2023, is now untenable as CLOU has matured and NBFCs have shown their compliance. The RBI has increased digital access for NBFCs over the last decade, including through account aggregators and co-lending. Excluding them from CLOU creates an inconsistency and could lead to NBFCs using less transparent methods for digital lending. Recent regulatory changes, like the easing of Default Loss Guarantee (DLG) rules in February 2026, suggest a more balanced RBI approach to NBFCs and fintech. This makes the continued exclusion from CLOU seem out of step with this changing regulatory direction. Without NBFC involvement, the aims of embedding credit into daily digital payments, reaching more customers, and fostering competition will be significantly limited.
Integrating NBFCs: The Path Forward
Integrating NBFCs into the CLOU framework is expected. The key will be establishing clear rules, such as MCC restrictions and supervisory reporting, for their participation. This move could bring new opportunities for competition, innovation, and regulated lending. It would also expand the digital payment ecosystem and enable more advanced tracking of fund usage, especially as UPI transactions linked to credit cards converge with APMs. Including NBFCs is vital for meeting India's financial inclusion goals and realizing UPI's full capability as a credit delivery tool.