PRE-SANCTIONED CREDIT LINE Flashcards
What is a pre-sanctioned credit line?
A pre-sanctioned credit line is a type of loan where a bank pre-approves a borrower for a specific amount of money.
The borrower can access this credit line as needed without having to reapply for a loan each time funds are required.
Explain the key advantage of a pre-sanctioned credit line.
The primary advantage is convenience.
Borrowers don’t need to go through a lengthy loan application process every time they need funds. This can be valuable for unexpected expenses or short-term cash flow needs
How does a borrower access funds from a pre-sanctioned credit line?
The way funds are accessed depends on the bank’s specific setup. It might involve:
Linking the credit line to a bank account for transfers
A special credit card tied to the credit line
Integration with payment platforms
Are there any eligibility requirements for a pre-sanctioned credit line?
Yes. Banks typically consider factors like:
Credit history: A good credit score demonstrates responsible borrowing.
Income: Sufficient income ensures repayment ability.
Banking relationship: Existing customers with a good track record may have an advantage.
Besides convenience, what other benefits might a pre-sanctioned credit line offer?
Potentially lower interest rates compared to traditional loans, due to pre-approval.
Flexibility in using the funds as needed, within the credit limit.
The ability to improve credit scores with responsible usage and repayment.
What major change did the RBI introduce to UPI in April 2023?
The RBI allowed pre-sanctioned credit lines and overdrafts to be linked to UPI as a payment source. This expands the functionality of UPI beyond traditional bank accounts and wallets.
Explain how using UPI with a pre-sanctioned credit line works.
A bank pre-approves a customer for a credit line or overdraft.
This credit line is linked to the customer’s UPI ID.
When making a UPI payment, even with insufficient funds in their primary account, the transaction goes through using the credit line.
The customer repays the borrowed amount (plus interest) when funds become available.
What is the primary benefit of linking a credit line to UPI?
It allows for seamless payments even when a person’s bank account balance is low or empty. This increases flexibility and convenience for UPI users.
Are there limitations to using credit lines with UPI?
Yes. Banks will have credit limits on these lines, restricting the maximum amount that can be borrowed.
Interest rates apply to the borrowed amount.
Responsible usage is crucial to avoid overspending and maintain a healthy credit profile.
Who would be a good candidate for using UPI with a pre-sanctioned credit line?
People with fluctuating income or occasional cash flow shortages.
Individuals who want a convenient backup payment option.
Those who can responsibly manage credit to avoid excessive debt.
What is the primary benefit of the UPI-overdraft facility?
It offers a “Buy Now, Pay Later” (BNPL) option within the UPI ecosystem.
This facilitates purchases even with temporary insufficient funds, adding flexibility to spending.
How does the UPI-overdraft facility promote financial inclusion for less-privileged individuals?
Access to small, short-term credit: It can act as a lifeline during financial crunches, especially in the latter part of the month.
Reduces reliance on exploitative lenders: UPI-overdrafts can provide a more affordable alternative to high-interest loans from local moneylenders.
Convenience: Eliminates the need for travel and complex bank paperwork, making the process more accessible.
In what way does a UPI-overdraft differ from a traditional overdraft?
Simplified access: UPI’s ease of use makes accessing the overdraft seamless during everyday transactions.
Potentially smaller credit limits: UPI-overdrafts might be geared towards smaller, short-term borrowing needs.
Integration: Tightly integrated with the existing UPI payment network.
What are some potential use cases of the UPI-overdraft facility?
Covering unexpected expenses (medical, repairs, etc.)
Managing cash flow gaps before salary/income arrives.
Purchasing essentials during periods of temporary financial strain.
Are there any limitations to consider with the UPI-overdraft facility?
Responsible use is crucial: It’s important to avoid over-reliance and maintain a healthy repayment cycle.
Credit limits: The amount available for borrowing may be limited.
Interest charges: Interest will still apply to the used portion of the overdraft.
