EXPLORING UPI'S IMPACT ON CREDIT GROWTH IN RURAL INDIA: A PANEL DATA ANALYSIS (2011–2023)

Abstract

This dissertation investigates the impact of digital financial infrastructure— specifically the Unified Payments Interface (UPI) on credit growth across Indian states, with a particular focus on rural regions. Launched in 2016, UPI has transformed India’s digital payment landscape, but its implications for formal credit expansion remain underexplored, especially in demographically and economically diverse rural areas. Using a panel dataset covering major Indian states from 2011 to 2023, this study employs a fixed-effects regression model to examine the relationship between UPI adoption and the level of credit outstanding. The findings indicate a nuanced relationship between digital payments and credit flows. While the average impact of UPI (captured through a post-2016 dummy variable) on credit growth is positive, it is not statistically significant suggesting that the overall national shift to UPI may mask substantial heterogeneity across regions. However, when focusing on states with a higher proportion of rural population and significant UPI transaction volumes, a positive significant association is observed, implying that digital payment infrastructure has facilitated greater credit expansion in rural settings. This finding supports the hypothesis that UPI may play a more catalytic role in areas traditionally underserved by formal banking systems. The temporal analysis reveals a strong upward trend in credit outstanding before 2016, followed by stagnation and decline in subsequent years, despite the proliferation of UPI. This pattern may reflect broader structural disruptions, including the shock of demonetization in 2016, the credit crunch among non-banking financial companies (NBFCs) in 2018, and the economic upheaval caused by the COVID-19 pandemic in 2020–21. This study contributes to the growing literature on digital financial inclusion by highlighting the evolving role of UPI not just in facilitating transactions, but in potentially enabling access to formal credit. The findings emphasize the need for policymakers to consider regional disparities and rural dynamics when designing credit and digital inclusion policies. Future research could benefit from more disaggregated data, particularly at the district or block level, to assess the micro-level impacts of digital finance on rural credit access and to refine policy interventions accordingly.