Credit Line on UPI: Why NBFCs Must Be Included

Imagine running low on funds and still wanting to make that quick payment—now, with a credit line on UPI, that’s possible and incredibly smooth. A credit line will allow users to access instant credit for payments even if the transaction account has insufficient funds. You apply through your bank, get your credit evaluated, and then just link this line to your preferred UPI app and repay the borrowed amount in instalments based on the agreement with the lender, akin to a virtual credit card but minus the plastic. 

India’s financial sector stands at a fascinating crossroads. The Unified Payments Interface (UPI) has already transformed how money moves in the country, creating a seamless digital highway that connects every corner and every income group. With nearly 20 billion monthly transactions and close to 500 million active users, UPI today ranks as the world’s largest real-time digital payment system.

The next big leap is Credit Line on UPI (CLOU), a facility that lets consumers draw on pre-approved credit instantly, at the point of purchase, without the friction of paperwork. Introduced by the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) in 2023, CLOU promised to make credit as seamless as payments. 

Yet, a gap remains. So far, only scheduled commercial banks and, more recently, small finance banks have been allowed to participate. NBFCs, which form the backbone of financial inclusion in India, remain excluded. NBFCs accounted for 56% of all new credit in FY24 and have always been the ones who reach the underserved and unstructured income segment of the population.

NPCI itself describes CLOU as “an innovative offering aligned with the RBI’s vision … empowering individuals and small businesses with pre-sanctioned credit lines usable instantly via UPI.” But for this to reach its full potential, NBFC participation is essential.

The Journey So Far—And the Gaps

NPCI officially launched CLOU in September 2023 and Banks such as HDFC, ICICI, and Karnataka Bank have rolled out CLOU, with SBI piloting. Amongst the Small Finance Banks (SFBs), Suryoday SFB, in partnership with Paytm Postpaid, went live in September 2025.

- Platforms like PhonePe and Paytm have already integrated CLOU, reporting that it boosts checkout conversions. 

However, ICICI Bank seems to have discontinued its Pay Later UPI credit product in May 2025, raising questions about profitability and scalability. It is pointed out by some analysts that with NBFCs sidelined, innovation and reach remain bank-centric, limiting CLOU’s true potential.

Why Include NBFCs & Risks of Including NBFCs into CLOU

Imagine running low on funds and still wanting to make that quick payment—now, with a credit line on UPI, that’s possible and incredibly smooth. A credit line will allow users to access instant credit for payments even if the transaction account has insufficient funds. You apply through your bank, get your credit evaluated, and then just link this line to your preferred UPI app and repay the borrowed amount in instalments based on the agreement with the lender. This is akin to a virtual credit card but minus the plastic. 

However, this would be made more inclusive and grassroots-friendly if NBFCs were included. Take the case of a small fruit or vegetable vendor. They take money or credit from the moneylender or wholesaler, buy the goods and then repay them at the end of the day or the next day, but this comes at an exorbitant rate of interest. If a bank can structure a credit line based on their pay-ins, this would solve a big issue for them. Without NBFC participation in UPI, many gig workers are forced to rely on expensive informal lenders. 

Risks arising out of this initiative could be broadly classified as credit risk, consumer protection, operational and regulatory & reputational. NBFCs often serve first-time or informal borrowers with limited credit histories, like gig workers and micro merchants. Extending CLOU to them could create over-leveraging if not monitored carefully. RBI has warned that “economic disruptions may intensify systemic risks to India’s financial sector primarily because NBFCs remain vulnerable due to deteriorating asset quality.”

In terms of consumer protection, few NBFCs have been flagged in the past for opaque pricing and harsh recovery practices. CLOU could magnify these risks if standards are not enforced. The sheer volume of NBFCS might create an operational and regulatory risk, as NPCI and RBI would probably face supervisory challenges and a reputation risk for UPI in case of some large failures of NBFCs, which could result in people blaming the UPI platform. 

There is yet another issue from the customer’s point of view. A Bank can structure this facility as a “need to draw” like an Overdraft whereas an NBFC has to structure this as a pure standalone credit line, drawn down in one go, and the risk is that the money is being less useful for liquidity management.

A Graded Approach for Inclusion

Start with systemically important NBFCs with strong compliance records and mandate real-time reporting to credit bureaus. This would prevent credit or loan stacking. Bring in loan size caps during the first roll-out and standardize disclosure norms and documents on interest rates and other terms to protect consumers. For example, earlier fintechs piloted digital KYC and instant lending apps targeting MSMEs, allowing live experimentation and relaxed regulatory requirements but close monitoring for customer protection and risk, and a similar approach could be tried out for this. 

RBI and NPCI can work on a real-time oversight framework for CLOU during the pilot phase – NPCI on the tech side and RBI on the regulatory side. 

Why It Matters

India’s story of financial inclusion has always been driven by those who dare to serve the last mile. NBFCs have proven their ability to reach informal workers, small shopkeepers, farmers, and gig economy participants — segments banks often overlook. To exclude them from CLOU is to exclude the very citizens UPI was meant to empower. 

Conclusion

CLOU is one of the most promising innovations in India’s financial sector. But for it to live up to its vision, NBFCs must be part of the journey. With safeguards in place, their inclusion will expand access to credit for millions of underbanked, spark new innovations through fintech-NBFC partnerships and, more importantly, will further establish the founding principle of UPI viz., neutrality and inclusion. If UPI is India’s crown jewel, then its brilliance must not be confined to banks alone and should shine for all.