Let’s not promote gung-ho credit culture through UPI

United Payment Interface (UPI) was a watershed event in the evolution of inclusive banking inasmuch as it provided gravitas for embracing banking and banking transactions by the hitherto unbanked. It is heartening and helpful to find itinerant vegetable and peanut vendors to name just two accepting payments through a customer’s mobile phone with alacrity, with the newfound gushing glee and enthusiasm of novitiates. Vegetables bought on the street-side for Rs 31 by using one’s Gpay for example helps both the vendor and the housewife. The former gets business, the latter the comfort of carefree shopping without having to carry her purse with or without her debit or credit card tucked inside and both are spared the irksome botheration of finding ‘change’. Banks to which such accounts are related find their cash registers ringing with small-small transactions all the time. Their cashiers are also spared the tedium of counting wads of currency notes piled up on the counters by merchants

Indeed, from the earlier perception of card payments being elitist, mobile payments have come to cater to the hoi polloi. Peer to peer (P2P) and person to merchant (P2M) transactions have never been easier. And BTW, merchants are spared the burden of charges known as merchant discount rate (MDR) charged by banks not only to cover their own overheads but to pay for the services in this regard rendered by Visa and MasterCard of the world. The desi RuPay cards might have been cannibalised by UPI but the RBI and NPCI have taken the slight in their strides a la Hindustan Unilever that does not mind Hamam being cannibalised by Rexona or Lifebuoy. For RBI what is important is weaning people away from cash and promoting banking habit. The ubiquitous cell phone and its concomitant cell number has made all the difference. One’s cell number is linked to her bank account which is debited or credited when a transaction through mobile takes place.

The RBI however is allowing itself to be carried away. In its MPC meeting of April 6, it announced pre-sanctioned loans through UPI. This could be dangerous. While credit does allow one the satisfaction of buying now, paying later (BNPL), UPI credit is fraught both for the bank and its customer. The bank after all has scanty information about its customer’s ability and willingness to service the loan notwithstanding the much-wanted CIBIL credit scores. The danger of retail NPA would lurk as opposed to the extant wholesale NPA. CIBIL to be sure has its antennae up to track everyone’s credit behaviour, as it were, but the real issue is that there is a thriving and parallel loan market outside the banking system, especially in the hinterlands. Loan sharks aren’t exactly the stuff of legends and novels. They lurk even in cities with their ubiquitous, looming and ready presence. While they may be practicing usury, their sheer informality beckons the needy to them. The point is CIBIL scores can hardly be expected to track what happens in the subterranean economy.

The RBI might pivot and say that it is exactly to wean away people from loan sharks that it is making credit available through UPI but banks singed by loan melas would be careful in choosing their UPI borrowers thus defeating the objective of the new initiative. Like credit cards, UPI credit would be unsecured loans carrying much higher interest than on gold and home loans. In microfinancing and Mudra loans, at least the lenders get to know the borrowers personally. UPI pre-sanctioned loans are too remote and impersonal, all happening in the virtual world. Muhammad Yunus’s Grameen bank model of microfinancing was underwritten by the group to which one belonged. Women of a particular village constituted a group. With such group standing guarantee, each woman considered defaulting infra dig.

In the US, credit card usage is unavoidable as stores expect their customers to swipe credit cards that are processed much faster unlike debit cards that take more time to be processed as one at the end of the day pays from his balance in his bank account. The verification of sufficiency of the balance obviously takes more time so much so that the swiping machine at the merchant establishment gives up saying it is taking too long. Customers in fact equip themselves with store or product or restaurant specific credit cards to get more bang for their bucks. The credit card culture in the US caters as much to convenience seekers as to gung-ho spendthrifts.

RBI, willy-nilly, would involuntarily be encouraging a spendthrift attitude with its espousal of credit for all seasons and all reasons and to all persons, besides courting bad debts when it is time to pay up after the binge. Well-meaning cynics may turn around and ask indignantly with injured innocence, so what? Haven’t the big borrowers been indulged all along, is their usual counter. It is true that bulk of the bad debts have been piled up by big ticket borrowers who divert the funds right under the nose of the banks and the law-enforcing agencies, often to distant shores through over-invoicing and other subterfuges. That is why asset-based financing caught the fancy of lenders because diversion is impossible when a lender offers to buy what a borrower needs instead of releasing dollops of cash into his coffers. In fact, this is the distinguishing feature of Islamic banking under which banks don the robes of lessors. RBI pre-sanctioned UPI loans may be confined to durables like vehicles, air-conditioners and washing machines and not for meeting routine expenses in day-to-day life.

S Murlidharan is a freelance columnist for various publications and writes on economics, business, legal, and taxation issues

Published on: Friday, April 28, 2023, 06:00 AM IST