UPI Drives Credit Growth, Reduces Financial Exclusion In India: Study

New Delhi: India’s Unified Payments Interface (UPI) has succeeded in increasing financial inclusion and promoting equitable economic growth by enabling underserved groups, including subprime and new-to-credit borrowers to access formal credit for the first time, according to a new study by IIM and ISB professors.

The authors said that the success of UPI can be replicated in other countries as well and India can play a leading role in helping them adopt the fintech system.

"Within a short span, UPI led to exponential penetration of digital payments across India and is used at all levels from street vendors to large shopping malls," said the paper prepared by IIM and ISB professors.

Since its launch in 2016, the Unified Payments Interface (UPI) has transformed financial access in India, enabling 300 million individuals and 50 million merchants to perform seamless digital transactions, the study states.

By October 2023, 75 per cent of all retail digital payments in India were through UPI. The rapid adoption of UPI was possible due to affordable internet across the country.

"The affordability of digital technology played a critical role, enabling widespread UPI adoption in rural and urban areas alike," according to the study.

According to the paper, a 10 per cent increase in UPI transactions led to a 7 per cent rise in credit availability, reflecting how digital financial histories enabled lenders to assess borrowers better.

"Between 2015 and 2019, fintech loans to subprime borrowers grew to match those of banks, with fintechs thriving in high UPI-usage areas," according to the study.

The authors said that fintech lenders scaled rapidly, increasing their loan volumes 77 times, far outpacing traditional banks in catering to smaller, underserved borrowers.

The study also highlights that despite the credit surge, default rates did not rise, showing that UPI-enabled digital transaction data helped lenders expand responsibly.