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This blog will highlight how the Non-revocable Mandate in UPI AutoPay can be a Game Changer for Microlending. Read on!
The NPCI (National Payments Corporation of India) introduced UPI AutoPay in 2020. It enabled users to automate their recurring payments with their favourite payment method – the UPI. With UPI AutoPay, users can set up their monthly or periodic bill payments like utility bills, mutual fund investments, membership charges, online subscriptions, and EMI and loan repayments.
For lending establishments, it is additionally imperative to ensure that their borrowers do not default on the loan repayments. They can do this by preventing their borrowers from cancelling the payments. Cashfree helps you do that with Non-Revocable Mandates in UPI AutoPay.
Read more about UPI AutoPay here
UPI AutoPay for Microlending
UPI AutoPay allows borrowers to make their periodic payments like loan repayments and EMIs with UPI. Microlending platforms can use UPI AutoPay to ensure that the borrowers repay their loans on time while also ensuring a seamless user experience.
Loan repayments are commonly split into periodic payments (biweekly, monthly, quarterly, half-yearly or yearly) to reduce the financial burden on the borrower. Here, the borrowers make payments on a recurring basis. It is ideal to create a UPI AutoPay mandate if:
- Each transaction is below or equal to ₹15,000
- Borrowers are active UPI users
- The lender wants to automate the loan repayments so that the borrowers cannot cancel it
UPI AutoPay is advantageous to both the lender and the borrower. The lender gets timely payments and simultaneously the borrower can avoid loan defaults.
Challenges Faced by Lenders
Microlenders are a key part of the financial sector in India. As of March 2023, NBFCs dominated the microfinance market with a portfolio share of 37.3%1. In the realm of lending, businesses, both large and small, often face a myriad of challenges. Among these, perhaps none is as pervasive and potentially detrimental as loan repayment defaults. Lenders face further consequences and challenges, a few of which we are listing below:
1. Loan Defaults
Loan defaults can occur due to a million reasons. For example, insufficient balance in the linked account, financial difficulties, intention of fraud, or even forgetting to pay on the day the amount is due. On the other hand, loan defaults are more likely to happen if the payments are not automated.
2. High Operational Costs
In the event of loan defaults, the lending organisations are compelled to allocate significant time and resources towards collecting the outstanding amounts. Likewise, in the case of repeated defaults, lenders may even find it necessary to take a legal course of action. This undertaking incurs substantial expenses and also takes a significant amount of time and effort, all without assured outcomes.
3. Actualisation of Credit Risk
Credit risk is the probability of financial loss that the lender can incur due to loan defaults by the borrower. Loan defaults lead to a financial loss for the lender if the value of the collateral security falls short of the expected sum.
4. Irregular Cash Flows
Repeated loan defaults lead to irregular cash flows. As a result, this increases the risk of financial loss for the lending organisation.
5. Competitive Disadvantage
In the event of financial losses and irregular cash flows, the liquidity risk – the mismatch between the assets and liabilities – will grow. Therefore, this puts the lenders in a financially tenuous position with their investors potentially damaging their reputation in the market.
Introducing Non-Revocable Mandates of UPI AutoPay
UPI AutoPay usually gives the end user/payer the option of cancelling or pausing their mandates from their UPI app. Now, with Cashfree’s UPI AutoPay, the mandates can be set as ‘non-revocable’ for loan repayments and EMI collections.
The term ‘non-revocable’ means that customers cannot initiate cancellation or pause their mandates through their UPI app. NPCI2 introduced Non-revocable mandates in July 2022. This is to prevent defaults on payments that fall under ‘Promise to pay a debt or liability’.
Why UPI AutoPay with Cashfree?
- Instant Mandate Creation: Borrowers can authorise and schedule future payments of up to ₹15,000. All they need to do is complete a one-time authentication on any UPI app within 10 seconds.
- Automatic Payment Scheduler: With Cashfree’s payment scheduler, it is possible to schedule weekly, bi-weekly, monthly, quarterly, half-yearly, and annual payments. One can also devise a custom payment plan with fixed amounts.
- High Success Rate: UPI AutoPay minimises customer drop-offs. It offers a 35% higher success rate as compared to other recurring payment methods.
- Third-Party Validation: With Cashfree, lenders can authorise UPI mandates only on KYC-approved bank accounts to avoid payment failures.
- Non-revocable Mandate Creation: Ideally, the Pause/Cancel button should not be visible in the UPI apps for active mandates if they are non-revocable. Given that not all TPAPs have yet integrated these modifications, Cashfree takes measures to ensure that even if a customer attempts to click the Cancel/Pause button, they will encounter an error message indicating that this action is not permitted.
Advantages of Non-Revocable Mandates
Implementing non-revocable mandates in UPI AutoPay reduces the risk of loan defaults for microlenders and NBFCs by a huge margin. Let’s take a look at some of the benefits that non-revocable mandates bring with them:
1. Reduced Default Rates
With non-revocable mandates, the risk of loan defaults goes down by a large percentage. UPI AutoPay ensures consistent and automatic payments. On the other hand, the non-revocable mandate ensures that the borrower cannot cancel or pause the payments.
2. Enhanced Efficiency
Non-revocable mandates in UPI AutoPay automate the complete payment process for loan repayment and EMI collection. Moreover, they entirely eliminate the risk of the payer cancelling or pausing their payments. For lending businesses, this means fewer loan defaults, automation of processes and lower operational inefficiencies.
3. Compliance and Security
Defaulting on a loan repayment or an EMI is considered an offence committed by the loan defaulter under Section 25 of the Payment Settlement Act, 2007. Non-revocable mandates help the borrowers to be compliant with this Act. At the same time, it also protects the rights of the lenders where borrowers have to repay any loans that the lenders have provided.
4. Improved User Experience and Trust
UPI AutoPay simplifies the recurring payments for loans and EMIs for the borrowers. Using UPI to automate the payments gives a seamless payment experience that provides the payers with both convenience and reliability.
Implementing UPI AutoPay’s Non-Revocable Mandate for Microlending
From an implementation perspective, UPI AutoPay is the easiest of all recurring payment methods. The payers can set up UPI AutoPay in seconds with just two steps:
- Choose the UPI app or end the UPI ID
- Approve a transaction by entering the UPI pin (This is a one-time authorisation)
Future recurring payments are deducted automatically from the borrower’s account without any user intervention.
As a lender, your role is to set the Revocable Flag as “N” during the mandate creation process. This would remove the cancel/pause options for the borrower once the mandate is created. Lenders should also make sure to educate the borrowers on non-revocable mandates to ensure transparency and clear communication.
Summary
Preventing loan defaults is not just the borrower’s responsibility; it is a shared responsibility of both the lender and the borrower. By giving your customers multiple payment options, you are ensuring a seamless experience. Thus, you are paving the path for repeat customers. UPI AutoPay not only automates your loan repayment cycles, it also helps you prevent loan defaults with features like non-revocable mandates and Third-Party Validation (TPV).
Want to learn more about UPI AutoPay or recurring payments? Get in touch with the Cashfree team now→Contact sales
FAQs
Can the lender cancel a non-revocable mandate?
The lending company can cancel a non-revocable mandate by connecting with the Acquiring Bank. However, the borrowers/payers cannot cancel the mandate once it is created.
When should a lender choose UPI AutoPay mandates over e-Mandates?
A lender should choose UPI AutoPay instead of e-Mandate to automate their loan repayments in the following cases:
- The transaction amount is less than or equal to 15000 rupees. If the transaction amount is higher, then e-Mandate (transaction limit of 50 lakhs) would be the best option to go with
- The borrowers are not willing to share their net banking or card details. UPI AutoPay requires just the UPI ID of the payer
- You want to hasten your mandate-creation process. It takes seconds to create UPI mandates while it takes 24 hours to create e-Mandates
