Microlending institutions are pivotal in fostering financial inclusion and empowering underserved communities. However, these establishments often grapple with the pervasive challenge of loan repayment defaults, which can have far-reaching ramifications. Fortunately, the advent of non-revocable UPI mandate has ushered in a new era of streamlined loan management, offering a potent solution to mitigate defaults and enhance operational efficiency.
Microlending in India
India’s microfinance sector has experienced remarkable growth, with Non-Banking Financial Companies (NBFCs) emerging as the dominant force, commanding an impressive 37.3% market share as of March 2023. This burgeoning industry has become an indispensable pillar of the nation’s financial ecosystem, providing access to credit and fostering economic empowerment for millions of individuals.
Challenges Faced by Microlenders
Despite their pivotal role, microlenders confront many challenges that threaten their sustainability and hinder their ability to serve their clientele effectively. Among these hurdles, loan defaults are a formidable obstacle, with far-reaching consequences reverberating across the lending landscape.
1. Loan Defaults
Loan defaults can stem from various factors, including insufficient account balances, financial hardships, intentional fraud, or even simple forgetfulness. Failure to make timely payments disrupts cash flows, jeopardises the lender’s financial stability, and erodes their capacity to extend credit to those in need.
2. Escalating Operational Costs
When borrowers default on their obligations, microlenders must dedicate substantial resources to recover the outstanding amounts. This often entails time-consuming and costly collection efforts, legal proceedings, and administrative overheads, which strain the organisation’s financial and operational capacities.
3. The Spectre of Credit Risk
Credit risk, the potential for financial loss due to borrower defaults, looms large over microlending institutions. When the collateral value falls short of the loan amount, lenders face the harsh reality of incurring substantial losses, further compounding their financial woes.
4. Irregular Cash Flows
Repeated loan defaults can disrupt the steady stream of cash inflows, creating a mismatch between assets and liabilities. This imbalance heightens liquidity risk, jeopardising the lender’s ability to meet their financial obligations and hampering their long-term sustainability.
5. Competitive Disadvantage and Reputational Harm
Financial losses and irregular cash flows can erode a microlender’s competitive edge, making it challenging to attract and retain investors. Moreover, a tarnished reputation in the market can further exacerbate these challenges, creating a vicious cycle that threatens the lending institution’s very existence.
What is UPI Mandate?
A UPI (Unified Payments Interface) mandate is a recurring payment authorization that allows you to set up automatic payments for bills, subscriptions, or loans. Once a mandate is created, the specified amount will be automatically deducted from your bank account on the scheduled date.
Types of UPI Mandates
There are two main types of UPI mandates:
- Revocable Mandates: These mandates can be canceled or paused by the user at any time.
- Non-Revocable Mandates: These mandates cannot be canceled or paused once created. They are typically used for recurring payments like loans or EMIs.
Non-Revocable UPI Mandates: A Game-Changer for Microlending
Amidst this landscape of challenges, the National Payments Corporation of India (NPCI) introduction of non-revocable UPI mandates in July 2022 has emerged as a beacon of hope for microlenders. This innovative feature, designed to prevent defaults on payments classified as “Promise to pay a debt or liability,” empowers lenders to safeguard their interests while ensuring a seamless borrower experience.
The Benefits of Non-Revocable UPI Mandates
Implementing non-revocable UPI mandates offers many advantages that can transform the microlending landscape, addressing many of the challenges faced by these institutions.
1. Reduced Default Rates
Non-revocable UPI mandates significantly reduce the risk of loan defaults by eliminating the borrower’s ability to cancel or pause scheduled payments. This feature ensures consistent and automatic loan repayments, providing microlenders with a reliable and predictable cash flow.
2. Enhanced Operational Efficiency
Non-revocable UPI mandates automate the entire loan repayment process, minimising the need for manual intervention and freeing up valuable resources. By eliminating the risk of borrowers cancelling or pausing payments, microlenders can streamline their operations and reallocate resources toward more productive endeavours.
3. Compliance and Security Assurance
Defaulting on loan repayments or EMIs is considered an offense under Section 25 of the Payment Settlement Act, 2007. Non-revocable UPI mandates help borrowers comply with this Act while simultaneously protecting the rights of microlenders, ensuring they receive the funds owed.
4. Improved User Experience and Trust
UPI AutoPay simplifies the recurring payment process for loans and EMIs, providing borrowers with a seamless and convenient experience. By leveraging the familiarity and trust associated with UPI, microlenders can foster stronger relationships with their clientele, enhancing customer satisfaction and loyalty.
Implementing Non-Revocable UPI Mandates for Microlending
From an implementation standpoint, UPI AutoPay stands as one of the most user-friendly recurring payment methods available. Borrowers can set up UPI AutoPay in a matter of seconds by following these simple steps:
- Select the preferred UPI app or provide their UPI ID.
- Approve the transaction by entering their UPI PIN (a one-time authorisation).
- Once the mandate is established, future recurring payments will be automatically deducted from the borrower’s account, eliminating the need for manual intervention.
- To leverage the power of non-revocable UPI mandates, microlenders need to set the “Revocable Flag” to “N” during the mandate creation process. This simple step removes the borrower’s cancel/pause options, ensuring the continuity of scheduled payments.
However, microlenders must educate their borrowers about the implications of non-revocable mandates, fostering transparency and clear communication throughout the lending process.
Choosing UPI AutoPay over e-Mandates
While e-Mandates offer an alternative for recurring payments, UPI AutoPay emerges as the preferred choice for microlenders in specific scenarios:
- Transaction Amount: If the transaction amount is less than or equal to ₹15,000, UPI AutoPay is the optimal solution. For more significant amounts exceeding ₹50 lakhs, e-mandates would be the more suitable option.
- Borrower Preferences: When borrowers are reluctant to share their net banking or card details, UPI AutoPay provides a convenient alternative, requiring only the UPI ID for mandate creation.
- Expedited Mandate Creation: UPI mandates can be created within seconds, while e-mandates typically require a 24-hour processing period. Thus, UPI AutoPay is faster and more efficient for time-sensitive transactions.
Embracing UPI AutoPay with a Trusted Payment Gateway
To fully harness the potential of UPI AutoPay and non-revocable mandates, microlenders are encouraged to partner with a reputable and reliable payment gateway provider. These platforms offer a range of value-added services, including:
- Instant Mandate Creation: Borrowers can authorise and schedule future payments of up to ₹15,000 through a seamless one-time authentication process on any UPI app, taking just 10 seconds.
- Automatic Payment Scheduling: Advanced payment scheduling capabilities allow microlenders to set up weekly, bi-weekly, monthly, quarterly, half-yearly, or annual payment plans, as well as custom payment schedules tailored to their specific needs.
- High Success Rates: UPI AutoPay boasts a 35% higher success rate than other recurring payment methods, minimising customer drop-offs and ensuring reliable payment processing.
- Third-Party Validation: To further enhance security and prevent payment failures, trusted payment gateways can authorise UPI mandates only on KYC-approved bank accounts, adding an extra layer of verification.
- Non-Revocable Mandate Enforcement: While not all Third-Party App Providers (TPAPs) have integrated the non-revocable mandate feature, reputable payment gateways take proactive measures to ensure that even if a borrower attempts to cancel or pause an active mandate, they will encounter an error message indicating that this action is not permitted.
By partnering with a trusted payment gateway provider, microlenders can leverage the full potential of UPI AutoPay and non-revocable mandates, streamlining their operations, minimising defaults, and fostering a seamless lending experience for their borrowers.
How to Cancel a UPI Mandate for Microlending
To cancel a UPI mandate for microlending, you’ll typically need to follow these steps:
- Contact your lender: Reach out to the microlending institution where you obtained the loan. Provide them with your loan details and request to cancel the UPI mandate.
- Provide necessary information: You may be asked to provide your UPI ID, the bank account linked to it, and any other relevant details.
- Confirm cancellation: Your lender will process your request and confirm the cancellation of the UPI mandate.
Note:
- Non-revocable mandates: If your mandate is non-revocable, it might be more difficult to cancel. You may need to provide a valid reason or documentation to support your request.
- Payment processing: Be aware that there might be a delay between your cancellation request and the actual termination of the mandate. Any payments scheduled during this period might still be processed.
Conclusion
The introduction of non-revocable UPI mandates represents a transformative innovation in the microlending landscape. It offers a powerful solution to address the pervasive challenge of loan defaults. By harnessing this feature, microlenders can mitigate the risks associated with defaults, enhance operational efficiency, and foster a more sustainable lending ecosystem.
As microfinance drives financial inclusion and economic empowerment, embracing innovative technologies like non-revocable UPI mandates becomes imperative. By doing so, microlenders can safeguard their financial interests and ensure their clients a seamless and convenient borrowing experience.
The journey towards a more inclusive and resilient microlending landscape begins with adopting cutting-edge solutions like non-revocable UPI mandates. By embracing this innovation, microlenders can pave the way for a future where access to credit is not just a privilege but a fundamental right for all.
FAQs
1. What is a non-revocable UPI mandate?
A non-revocable UPI mandate is a feature introduced by the National Payments Corporation of India (NPCI) that prevents borrowers from cancelling or pausing scheduled payments for loans or EMIs. It ensures consistent and automatic repayments, reducing the risk of defaults for microlenders.
2. How do non-revocable UPI mandates benefit microlenders?
Non-revocable UPI mandates offer several benefits to microlenders, including:
- Reduced default rates: Consistent repayments minimise the risk of borrowers defaulting on their loans.
- Enhanced operational efficiency: Automated payments streamline operations and reduce administrative overhead.
- Improved cash flow: Predictable repayments ensure a steady cash flow for microlenders.
- Reduced credit risk: Lower default rates mitigate credit risk and protect the lender’s financial stability.
3. How do borrowers set up a non-revocable UPI mandate?
Borrowers can set up a non-revocable UPI mandate through their preferred UPI app by following these steps:
- Select the UPI app and provide their UPI ID.
- Approve the transaction by entering their UPI PIN.
Once the mandate is established, future recurring payments will be automatically deducted from their account.
4. Are there any limitations or challenges associated with non-revocable UPI mandates?
While non-revocable UPI mandates offer significant benefits, there are a few considerations:
- Borrower awareness: Microlenders must educate borrowers about the implications of non-revocable mandates to ensure understanding and avoid misunderstandings.
- Technical limitations: Some UPI apps or payment gateways may limit or restrict the use of non-revocable mandates.
- Legal implications: Borrowers should know the legal consequences of defaulting on loan repayments.
5. Can borrowers cancel or pause a non-revocable UPI mandate?
No, a non-revocable UPI mandate cannot be cancelled or paused once established. This feature is designed to ensure consistent and automatic payments. If a borrower faces financial difficulties, they should contact their lender to discuss possible solutions or repayment arrangements.
