Hi everyone,  

Welcome to the 135th edition of The Pattern, a weekly where we dive into the latest from the world of economy, technology and finance. Let’s get started. 

RBI expands UPI credit  

India's retail inflation cooled down to 5.48% in November from 6.21% in October. Food inflation, which constitutes roughly half of the overall Consumer Price Index basket, decreased to 9.04% in November, down from 10.87% the previous month. Rural inflation increased to 9.10%, compared to 6.68% in October, while urban inflation rose to 8.74%, up from 5.62% in the prior month. 

Amid this fiery economic landscape, the RBI has decided to improve credit accessibility for 'new-to-credit' groups, including small businesses, micro-entrepreneurs, and individuals in rural and semi-urban areas. While some may worry about repayment challenges and a potential rise in defaults , which could strain the economy further, there's a glimmer of hope. This move could bring some much-needed positives. It's a risky step, but it might spark opportunities and resilience where it’s needed most.

The RBI has taken a leap forward with UPI. The regulatory body is crafting a financial ecosystem that caters to the urban elite and every individual at the last mile—be it a small business owner, a micro-entrepreneur, or someone entirely new to credit. 

Before addressing why this move is important, let's look into what it offers the borrowers and lenders.

A strategic shift in credit access  

Access to formal credit has long been challenging for India's underserved groups—small businesses, micro-entrepreneurs, and individuals in rural and semi-urban regions. For the " new-to-credit " customer, getting a loan often feels like climbing an unconquerable mountain. Limited credit histories and a lack of traditional credit scores have kept formal financial products out of reach for many. 

That's where digital payment platforms like UPI are stepping in to solve the problem. Until recently, however, the benefits of UPI were mainly limited to seamless payments. Credit accessibility remained an elusive dream for many, particularly in areas with high UPI adoption but limited banking infrastructure. This was not just an issue of inclusion—it was an economic bottleneck. When small businesses and micro-entrepreneurs are deprived of credit, India's economic growth stalls. Something had to change. 

A solution in action  

The RBI's move to allow small finance banks (SFBs) to offer pre-approved credit lines through UPI is a game-changer. In regions with high UPI adoption, loans to new-to-credit borrowers have already grown by 4% , and to subprime borrowers by 8%, according to a recent report. These numbers underscore the potential of UPI-enabled credit to drive financial inclusion. 

By leveraging their existing high-tech, low-cost infrastructure, SFBs can offer micro-loans—sometimes as small as ₹1,000—directly through a customer's UPI account. This eliminates the friction of paperwork, long approval times, and the intimidation of traditional banking systems.  

"Allowing Small Finance Banks to participate in the credit line in UPI arrangement is a step in the right direction ensuring not only better competition but also better financial inclusion." –– Vivek Iyer, Partner, Grant Thornton Bharat. 

It's a win-win. Borrowers gain easier access to much-needed funds, while banks can achieve incremental growth by tapping into a vast, underserved market. 

Through these initiatives, the RBI is doing more than just fostering financial inclusion. It's strategically managing liquidity to ensure economic stability. Here's how: 

• The RBI is unlocking a vast pool of untapped potential by encouraging SFBs and fintech lenders to serve new-to-credit customers. Between 2015 and 2019, fintech loans to subprime borrowers grew to match those of traditional banks in high UPI-usage areas.  

• These small loans, averaging ₹27,778, are not just numbers—they're lifelines for rural households, where the figure is seven times the average monthly expenditure. A report shows that despite the credit surge, default rates remained stable, demonstrating that UPI-enabled digital transaction data allowed lenders to expand responsibly. 

This shows how RBI is betting on Aggregators (AA) and alternative credit scoring models to improve credit access. Without these tech-driven approaches, it wouldn't have been possible to enable individuals with no prior loan history to access formal credit. Lenders can assess creditworthiness by analyzing digital transaction data and other non-traditional metrics without relying solely on outdated methods like CIBIL scores. 

The bigger picture  

These patterns indicate that RBI is strategically focused on managing liquidity effectively while also working to control inflation. When money flows steadily but responsibly, it fosters sustainable growth, cushioning the economy against volatility. 

Through these efforts, the RBI is not just fostering financial inclusion—it's crafting a blueprint for economic resilience and stability. 

That’s all for this week. I will see you next week. As always, I’ll leave some reading recommendations below. 

Reading List:  

1. Centre seeks nod for extra net spending of ₹44,143cr   

2. Why is India's credit card market slowing down? New report reveals the trends  

3. Rupee falls to an all-time low, RBI intervention counters bearish tilt  

4. Is peer-to-peer lending set for a crash?  

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates. 

Cheers, 

Mayank  

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.