A 10 per cent increase in per capita UPI transactions usually leads to a 4.6 per cent rise in fintech lending and 1.5 per cent in lending by commercial banks, as per the Centre for Advanced Financial Research and Learning (CAFRAL)’s ‘India Finance Report 2023’.

“The relationship is even stronger when the speed of growth is considered: a 10 per cent increase in the UPI growth rate is associated with an almost 8.1 per cent increase in fintech growth, compared to a 6.9 per cent corresponding rise in SCB (scheduled commercial banks) lending growth,” the report said.

It aimed to draw the linkages between the growth of the homegrown platform and the surge in digital lending, given the strong complementarities between the two.

Monthly UPI transaction data from 30 States and union territories over 2018-2022 and sector-wise lending data from CIBIL were analysed to understand the elasticity of per capita fintech and bank lending due to a 1 per cent increase in UPI transactions and the response of these two segments to a 1 per cent rise in UPI transactions.

UPI up-tick

“Regressions results indicate that fintech lending is strongly related to UPI growth,” it said adding that the up-tick of UPI has allowed lenders to access alternate data to determine creditworthiness and fintechs are more likely to do this as they primarily operate within the digital realm.

UPI transactions also reduce the effective distance between borrowers and lenders, eliminating frictions and increasing banks’ willingness to lend. Overall, the results indicate a stronger relationship between UPI and fintech lending, relative to lending from scheduled commercial banks.

UPI has also enabled an almost-universal system of digital payments and eased many logistical and geographical barriers to credit flow, it said, adding that since the pandemic UPI and fintech lending have both grown in tandem.

The UPI network has over 30 crore unique users and close to 400 participating banks. The value of transactions has grown at a CAGR of 163 per cent from FY18 to FY23 whereas the volume of transactions has grown at a CAGR of 56 per cent.

The average transaction size has risen from ₹120 in FY18 to ₹1,660 in FY23. The contribution of UPI in total digital transactions increased from 4 per cent in FY18 to 52 per cent in FY22 in terms of volume. In October, UPI touched a record high of 1,141 crore transactions, processing payments worth ₹17.16 lakh crore.