Explained | How UPI Now, Pay Later works

Pre-approved credit- an overdraft facility offered by banks- can be used through all UPI applications such as Google Pay, Paytm, MobiKwik, mobile banking UPI, etc. Read more to know how to use it.

The Reserve Bank of India recently allowed banks to offer a credit line facility to UPI users through a notification on September 4, 2023. With this, it has now become possible to make payments through UPI even when there’s not enough money in the bank account through a pre-sanctioned credit line. 

“Under this facility, payments through a pre-sanctioned credit line issued by a scheduled commercial bank to individuals, with the prior consent of the individual customer, are enabled for transactions using the UPI system," the RBI notification stated. 

Pre approved credit- an overdraft facility offered by banks- can be used through all UPI applications such as Google Pay, Paytm, MobiKwik, mobile banking UPI, etc. A specified limit will be pre-sanctioned, and once approved, it can be used to spend through UPI applications, the dues for which can be cleared later by the due date. Interest rates vary from bank to bank, but some might offer credit-free periods, meaning no interest is levied if the amount is repaid within stipulated time. 

At present, the feature has only been unlocked for paying merchants. Peer to peer transactions have not been allowed yet.

HDFC and ICICI Banks' credit lines

HDFC UPI Now Pay Later and ICICI PayLater are already launched credit lines by two of the most popular banks, which means their customers can use them for UPI transactions. A one time processing fee of Rs 149 is levied while activating the facility at HDFC, post which the bank will open an account and link it to the debit card account. Next, this pay Later account has to be linked to the UPI app.

At ICICI Bank, there is no activation charge, but a service charge is levied when more money is used than the limit set by the bank. Each PayLater ICICI bank account has a dedicated UPI ID, which can be linked to the UPI application. 

Both the banks have allowed a credit line of upto Rs 50,000 per user, but the limit may vary from one customer to another as per income and credit history.

Post RBI's announcement, more banks are likely to follow suit and begin offering credit line facilities for UPI transactions. 

Interest rates and surcharges

HDFC charges simple interest on the borrowed amount for the number of days borrowed. The interest amount is debited to the pay later account on the last day of every month. All the dues, the amount debited and interest incurred, are to be cleared by the end of every month. In case one fails to pay the amount within three days of the deadline, the money is deducted from the primary account.

ICICI bank, on the other hand, offers digital credit for 45 days. One can make instant payments of bill and UPI merchant transactions, the dues of which are automatically debited from the primary savings account at the end of the credit cycle. There are no interest charges for ICICI PayLater, though a service charge of Rs 75 is levied on every Rs 3000 spent in a month. 

Once implemented in entirety, the feature would benefit small borrowers and businessmen. Abhishek Kumar, a SEBI registered investment advisor (RIA) and Founder of SahajMoney, said to Economic Times, "Currently, banks require a lot of documents before issuing credit cards. Hence a large section of society gets excluded from accessing credit using credit cards due to the absence of formal income documents. Pre-approved credit lines will help UPI users as they can apply for it. The lending bank requires basic verification of personal accounts before providing them with a line of credit for UPI. This would help small borrowers or businessmen a lot as they can use this facility to manage their working capital needs."