Synopsis: UPI increased transaction efficiency, promoted financial inclusion, and decreased economic informality. The recent UPI developments, such as pre-sanctioned credit lines, aim to help bridge India’s credit gap. Continue reading to know more!

The micro, small, and medium-sized businesses (MSMEs) find it challenging to secure loans despite accounting for roughly a third of India’s gross domestic product (GDP). The credit gap is estimated to be $530 billion, with only 14% of the MSMEs in India having access to credit. The credit gap is the difference between the demand for external credit and the available supply of formal financing.  

Most MSMEs can’t furnish collateral and, therefore, can’t secure loans from traditional lenders. This results in a vicious debt cycle caused by borrowing from informal credit channels whose interest rates are twice as high. 

However, developments in UPI can fill this credit gap. Its innovative capabilities have already broken down traditional geographic borders, linking consumers to businesses via UPI One World. But how can it help close India’s credit gap? Read along to know more! 

The Wave Of UPI Transactions In India 

UPI is a technology platform based on the Immediate Payment Service (IMPS) framework that allows anyone to send money from their phone — immediately and securely. It’s easily accessible using any payment application or the BHIM app established by NPCI (the organization behind UPI).  

With the introduction of UPI, India has witnessed a digital revolution in financial inclusion. According to a PwC India report, UPI has become India’s biggest digital payments network, with transactions increasing by almost 60% yearly. PwC estimates the number of daily transactions to rise to 1 billion by 2026–27. 

The Recent Developments And Additions In UPI 

With the launch of Aadhaar-based verification for UPI and UPI Lite, one can engage in the digital economy, even those who do not have access to traditional financial institutions. In the following sections, we have discussed some recent developments in UPI and explained how they can help close India’s credit gap: 

Pre-Sanctioned Credit Line 

Pre-sanctioned credit lines from banks through the UPI platform allow the public to access credit quickly and seamlessly. So, how does this new feature work?  

You can use your pre-approved credit lines to pay through UPI instead of traditional cards. This means you can borrow money in increments, all with the convenience of QR codes.  

As long as the credit line remains open, you can repay the amount and borrow again when needed. 

Linking Loan Accounts, Benefitting The Banks And NBFCs 

Earlier, you could only link your UPI with debit accounts and RuPay credit cards. However, the recent developments to UPI allows users to link their credit accounts too, including loan accounts. 

Linking loan accounts to UPI eliminates the requirement for physical infrastructure, allowing financial inclusion of borrowers who do not have access to cards.  

Reshaping The Product Designs 

Banks and Payment Service Providers (PSPs) are leveraging UPI to develop customer-centric solutions that monetize UPI payments while lowering the cost of credit disbursement.  

Here’s how UPI is revolutionizing product designs in the financial landscape: 

  • UPI-Based Revolving Credit Lines 
  • Instant Overdrafts and EMIs 
  • Personal Loan Solutions 
  • Pre-Sanctioned Working Capital and Overdraft Credit Lines 
  • Rethinking Buy Now, Pay Later (BNPL) 

Robust Risk Management 

Risk management models rely on transaction parameters and offer a comprehensive view of borrowers’ creditworthiness. Some parameters that play a vital role in assessing the borrower’s creditworthiness are: 

  • Transaction decline due to insufficient funds 
  • Type of merchant 
  • Geographical location 

Plus, as credit exposure to customers increases, lenders are naturally inclined to review their credit portfolios more diligently.  

Catalyst For Financial Inclusion 

As of August 2023, UPI has processed over 10 billion transactions, and has almost 400 participating banks. Additionally, participating banks have grown from 21 April 2016 to 399 today. Users have surged to over 300 million, with over 50 million merchants on the UPI network by June 2022. 

Some ways through which UPI plays the role of a catalyst for this ecosystem to grow are discussed in the following sections. 

Access To Formal Credit With UPI In The Nation 

Here are some ways how UPI promotes the access to formal credit in India: 

  • It allows people from rural and remote areas to connect with banks and financial institutions easily. 
  • UPI has made the process of applying for loans easier and more user-friendly. Plus, it eliminates the need to revisit the banks and lenders multiple times, making it an accessible option. 
  • You can submit digital documents and credentials via the app, eliminating the need for physical paperwork. 

Changing The Lending Scenario In The Bharat Segment 

Here’s how UPI is transforming the lending scenario, particularly for MSMEs: 

  • Many MSMEs resort to informal sources for loans due to difficulties obtaining credit from formal financial institutions. UPI reduces the reliance on these informal sources. 
  • It also reduces the reliance on paperwork, making the lending process more efficient.  
  • Integration of UPI with solutions like contactless payment systems further encourages the adoption. For instance, the launch of ‘Rupay-on-the-Go’ — a contactless payment system — and contactless credit cards have simplified transactions for MSMEs. 

UPI Strengthening MSMEs With The Recent Developments 

UPI has the potential to close the credit gap in MSMEs by allowing them to access pre-approved credit lines from banks and NBFCs.  

This means MSMEs can get instant and hassle-free credit anytime and anywhere without needing physical documentation, KYC, or branch visits. According to reports, 70% of MSMEs believe UPI will soon power more than half of their retail sales.  

So, how does UPI help MSMEs strengthen their financial health?  

  • Convenience: UPI makes it convenient for customers to make payments and allows retailers to give receipts. It can also empower MSMEs with quick and efficient credit solutions. This infusion of working capital can enhance their cash flow and overall productivity. 
  • Different regions: Retailers in cities like Bengaluru, Chennai, and Hyderabad have seen as much as a 14% increase in the share of UPI transactions post-COVID. Smaller cities, while still experiencing growth, have seen a 4% increase. 
  • Attracts new customers: Adopting digital payment modes leads to increased sales – approximately 40% of retailers have noted that digital payments have helped them attract new consumers. 
  • Increases creditworthiness: Integrating digital payments has enabled new-age digital lenders to assess retailers’ creditworthiness based on their transaction history. Almost 40% of retailers now choose digital payments to repay their loans. 
  • Underwriting models: With easier access to credit and robust underwriting models, the risk of defaults decreases. MSMEs can receive credit that aligns with their financial capabilities, reducing the chances of non-performing assets (NPAs) for lenders. 


The rapid growth of UPI serves as the driving factor powering India’s economic progress. It is transforming India’s economic landscape and empowering its businesses by increasing credit availability, promoting digital financial inclusion, and increasing consumer expenditure.