Yesterday, the credit lines were added as source of funds for UPI payments.

But,

I don't think it will realise its full potential in its current form.

A short thread explaining my thoughts 🧵

How does the credit line on UPI work?

When you pay using UPI, money is transferred from your account to the merchant's. Your bank account is just the source of funds.

In the case of a credit line on UPI, funds will be transferred from your credit line instead of bank account.

How does this help consumers?

Instead of just being a payment method, UPI can now also be a method for availing credit where you just borrow what you need to spend.

This can boost spending by giving people more purchasing power

But

It does not necessarily mean that more people will get access to credit!

The reason why people in the low-income segments or informal economy don't get credit is not because this kind of platform or network did not exist.

It is because banks don't like to lend to this segment.

Banks have their own set of prime customers who they cater to.

And these folks already have access to credit cards with rewards, 30-40 day interest-free periods, UPI linkage of Rupay cards, etc.

Credit line on UPI holds little value apart from convenience.

The people who benefit from the credit line on UPI are new to credit (NTC) customers to whom banks don't lend.

In fact, more NTC borrowers are served by Fintechs (36%) and NBFCs (24%) than banks (22%).

Source - Experian

It is not a bad product but currently these credit lines can only be offered by banks.

To realise its full potential,
a) NBFCs should also be allowed to offer these credit lines on UPI. They can underwrite the borrowers who will actually benefit from the product.

or

b) A partnership of banks with fintechs who can source the right customers with a first-loss default guarantee provided by the fintechs as comfort.

What are your thoughts on the credit line by UPI?

The Potential of Credit Lines on UPI

RBI recently released the lending data for FY23

A thread 🧵showing the trends in how India lends

Impact of rate hikes 👇



The rate transmission is faster in home loans because most loans are directly linked to the repo rate.

Other loan rates are a bit stickier - they don’t fall that much or rise as much.

Retail Loans as a whole have grown by 19% in FY23.

Retail credit is at a lifetime high at ₹40 lakh crores.

Share of retail loans in total loans has also improved to 32%!

Most of the recovery in credit growth can be attributed to retail loan growth.

Personal Loans remains the favourite of the bankers.

The consumer durables segment has slowed down to 20% in FY23 from 75% in FY22. Discretionary spending and sensitivity to liquidity makes it a cyclical segment.

The consumer durables base is also quite low. It contributes to ~1% of retail loans.

As income levels rise in the coming years, the contribution will increase.

The average ticket size of home loans, education loans, vehicle loans and personal loans has increased over the years due to inflation (higher cost of homes, education, etc.).

But credit cards and consumer durables have stagnated.

The size of an average loan can differ across banks based on the product mix and customer base.

Foreign banks cater mainly to businesses and small finance banks cater mainly to individuals.

The average loan size is on the decline for private banks who are taking less risks and are focussing on their retail portfolio.

Public banks on the other hand have a higher share of industry loans.

Average loan size has been stagnant for rural and semi urban populations, and declining for metropolitan areas.

Note - It is not a de-growth.

While loans are growing steadily, the number of accounts (e.g. cards) are growing 2x as much which explains fall in loan size.

The trend of private banks taking market share from public sector banks continues.

Foreign banks, small finance banks have very low share.

But if you look at loans to small borrowers (loan less than 2 lakhs), the share of small finance banks improves a lot.

Interestingly, many small borrowers of private banks are based in metros.

The loan mix for these metros would be dominated by credit cards and consumer loans.

And to conclude, these are the 10 fastest growing segments in FY23

And the top 10 slowest growing segments in FY23.

Data source for this thread: Database of Indian Economy (DBIE)
Had covered FY22 in this older thread.

https://twitter.com/anshgupta64/status/1589090825786359812

And the deposits data for FY23 in this one.

https://twitter.com/anshgupta64/status/1670311560055603201?s%3D20&sa=D&source=editors&ust=1687638569126413&usg=AOvVaw2TQpZnY88vw2G6U9ee-Oc8

RBI Lending Data: Trends and Impact

How India lends

A thread 🧵showing the trends in Indian bank lending

Impact of rate hikes 👇


The rate transmission is faster in home loans because most loans are directly linked to the repo rate.

Other loan rates are a bit stickier - they don’t fall or rise to the same extent.

Most of the recovery in credit growth can be attributed to retail loan growth.


Average loan size has been stagnant for rural and semi urban populations, and declining for metropolitan areas. It is not a de-growth.

While outstanding loans have been growing, the number of accounts has been growing twice as fast.

The trend of private banks taking market share from public sector banks continues. Foreign banks, small finance banks have very low share.

Interestingly, many small borrowers of private banks are based in metros.

The mix would include credit cards and consumer loans.

Trends in Indian Bank Lending: Impact of Rate Hikes

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How does a credit card company make money?

Most of us know how credit cards work but very few of us know how credit card companies make money and their business model. 

We have to first understand the types of customers a credit card company has:

Credit card companies has three types of customers 
- Transactors (Those who pays their bill on time) 
- Revolvers (Those who delay their bill payment) 
- EMI (Those who convert their bills into EMIs)

Credit card companies mainly has two revenue streams:
a. Interest Income: Interest income earned on unpaid credit card dues + interest charge on conversion of balance into EMI.

b. Fee Income: MDR Fees (which is charged to merchant when you use your card) + Late Fees (Penalties) + Membership/renewal Fees (Annual fees, joining fees) + Fees on cash withdrawal (when you use credit card to withdraw cash)

On transactors, the card companies only earn the MDR since they repay on time each month. 
On Revolvers, the card companies earns the MDR + Late fees/Interest income earned on delayed payments.

On customers that convert bills into EMIs, credit card companies earns MDR + Interest income on bill amount converted into loan.

And annual fees would either be charged or not charged equally to all customers.

Typically interest income and fee income make up 50:50 revenue.

In terms of risk, transactors are the least risky. However in terms of profitability, they contribute the lowest.

The other 2 categories contribute to the revenues but they are also risky. You need all three categories to maintain portfolio quality and earn revenue!

So what are the expenses for credit card companies?
The credit card business carries high operating expenses compared to other retail segments. It is a combination of marketing-engagement costs, which includes acquisition and marketing costs, rewards redemptions costs, etc.

Other tech-based costs include costs to payment networks, like VISA and MasterCard, and payment gateways, etc. and others operating costs (including employee, sourcing, on-boarding, collections, and recovery costs).

Along with high opex, these companies are prone to higher delinquencies since credit cards are unsecured in nature. This makes up the credit cost of the business.

And finally financial costs like interest on borrowings since money is raw material for any financial company.

This is how the pre-tax ROA (Return on Assets) tree of a typical credit card business typically looks (Source: Nomura research report). 

So how are newer players disrupting the market?
1. They are able to reduce credit costs by building their own credit models and using analytics to minimise defaults.
2. They are able to build scalable technology to reduce operating costs.

3. They are able to offer a better experience to customers and give higher discounts and offers to acquire customers. However, high discounts may not be sustainable.

What are the challenges for these players?

These players lack the vintage and scale of operations of older players. So interest costs are higher. And much of the growth has been due to equity funding. 

Once that funding dries up, the business model is yet to be proved.

I will be going over SBI cards in the next thread.