RBI Closes UPI Credit Loophole

The Reserve Bank of India has implemented a significant regulatory change, mandating uniform prudential treatment for all credit facilities, irrespective of the technology used for disbursement. This directive effectively closes a loophole that previously allowed banks to offer preferential treatment to credit products channeled through the Unified Payments Interface (UPI).

Under these new directions, the nature of the credit itself will dictate capital adequacy, provisioning, and Non-Performing Asset (NPA) classification. For instance, a personal loan disbursed via UPI must be treated as a personal loan, aligning it with traditional credit products. Banks are also required to incorporate the terms of any payment-linked credit facility into their board-approved credit policies.

This action by the RBI addresses inconsistencies in how UPI-linked credit lines were previously classified by different banks, which led to regulatory arbitrage. By ensuring that the pipe through which credit flows does not alter its fundamental regulatory treatment, the RBI reinforces its commitment to activity-based regulation, where similar financial activities are subject to uniform rules regardless of the underlying technology.