Credit on UPI: How New RBI & NPCI Rules for Pre-Sanctioned Loans Are Changing Digital Payments
The Unified Payments Interface (UPI) has fundamentally transformed how Indians transact, moving from a novelty to an everyday necessity. Now, it’s poised for its next major evolution: the integration of credit on UPI. Following up on the Reserve Bank of India’s (RBI) initial announcement, the National Payments Corporation of India (NPCI) has rolled out updated guidelines for using pre-sanctioned credit lines directly through UPI, with changes taking full effect by August 31, 2025.
This groundbreaking feature allows users to link pre-approved personal loans from their banks to their UPI ID, effectively turning their UPI app into a tool for instant credit. It moves beyond simple bank-to-bank transfers, enabling a “scan now, pay later” model that could revolutionize small-ticket digital lending in India. For millions of users, this means seamless access to credit without the need for a physical credit card. But how does it work, and what do the new regulations mean for you as a consumer? This blog post decodes the new world of credit on UPI.
The Journey to Credit on UPI: A Brief Background
Before this innovation, UPI payments were primarily funded from savings accounts, overdraft accounts, prepaid wallets, or RuPay credit cards. In September 2023, the RBI and NPCI expanded this scope, allowing scheduled commercial banks to offer pre-sanctioned credit lines to their customers for use on the UPI network. This meant that if your bank approved you for a personal credit line of, say, ₹50,000, you could link that credit line to your UPI app and use it to pay merchants just as you would with your savings account.
The initial rollout was a game-changer, but it also necessitated a more structured framework to ensure security, transparency, and responsible lending. The latest NPCI circular, which all banks, payment service providers (PSPs), and UPI apps had to implement by August 31, 2025, refines these rules to create a more robust ecosystem for digital credit.
Decoding the New NPCI Guidelines for Credit on UPI
The updated rules are designed to ensure that the use of credit on UPI is both seamless and secure, aligning with the original purpose of the loan. Here are the key pillars of the new framework:
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Purpose-Based End Use: The most critical new rule is that credit lines can only be used for the specific purpose for which they were approved. For example, if a bank issues a pre-sanctioned loan for business expenses, the user can only use that credit line on UPI to pay merchants whose category code (MCC) is related to business supplies. This prevents the misuse of funds and ensures loans are utilized as intended.
Clear Roles for Banks and PSPs: The guidelines clarify the responsibilities of all parties involved :
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Issuing Banks (who provide the credit) must set clear terms and conditions, including credit limits, interest rates, and repayment schedules. They are also responsible for linking the credit line to the customer’s UPI ID with explicit consent.
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Acquiring Banks and PSPs (who onboard merchants) must ensure that merchants have the correct MCC codes to accept these purpose-specific credit payments.
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Enhanced Merchant Category Codes (MCC): To enforce purpose-based restrictions, the NPCI has mandated that all UPI participants enable a wider range of MCCs. This technical backend update is crucial. It allows the system to automatically identify whether a transaction at a particular merchant is permissible for a given credit line. For instance, a credit line for educational fees will only work at merchants coded as educational institutions.
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Inclusion of Small Finance Banks: The scope of offering credit on UPI has now been extended to Small Finance Banks, bringing this innovative feature to a wider customer base across the country.
What This Means for UPI Users
For the end-user, these changes bring a mix of new possibilities and responsibilities.
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Seamless Access to Credit: The biggest advantage is the convenience. Eligible users can access instant credit for specific needs—be it for shopping, travel, or education—without the friction of a traditional loan application process or the need for a credit card.
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Financial Inclusion: This feature is a massive step towards financial inclusion, especially for “new to credit” customers who may not have a credit card. It allows them to build a credit history through small, regulated digital transactions.
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Greater Transparency and Control: The purpose-based restrictions and clear terms from banks mean users have a better understanding of their loans. It encourages responsible borrowing by earmarking funds for specific needs, preventing the debt trap that can come with all-purpose credit.
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A More Regulated Experience: As you start using credit on UPI, expect a more structured experience. You might notice that certain credit lines don’t work for all types of payments, which is the system working as designed to ensure compliance and security.
The integration of credit lines into UPI is more than just a feature update; it’s a paradigm shift in how digital lending and payments intersect. By creating a regulated, purpose-driven framework, the RBI and NPCI are paving the way for a future where credit is more accessible, transparent, and seamlessly woven into the fabric of India’s digital economy.