The Reserve Bank of India (RBI) recently issued an internal clarification that
prepaid payment instruments (PPIs), such as m-wallets and prepaid cards, cannot be loaded through credit lines. The clarification hits certain fintech models in India including many buy
now pay later (BNPL) offerings and new age ‘challenger credit cards’. A common model for these includes fintech offered prepaid cards, which were backed by a credit line from a non-banking financial company (NBFC).
Media reports have found that fintech companies in India
are already withdrawing their offerings, even as the industry looks for alternative routes and has reached out to the regulator for more clarity on what is and isn’t allowed. The clarification has also thrown open the discussion around the future of BNPL itself,
along with larger questions around what the step means for fintech innovation in the country.
The options and impact for BNPL companies
PPIs in India are governed by RBI regulations, referred to as the
Master Directions on Prepaid Payment Instruments (PPI norms). While the circular (giving the recent clarification to the PPI norms) is addressed only to non-bank PPI issuers, the clarification applies to all PPIs, including bank-issued PPIs, thus affecting
both. As such, BNPL offerings from banks or fintechs, challenger credit cards from neobanks, and even postpaid facilities via wallets using this route are all equally impacted. Given this impact, affected fintechs are exploring other options:
- Credit options to load the PPIs apart from credit lines, like overdraft facilities from banks over existing bank accounts or issuance of actual loans from regulated entities, may be possible, however this needs further clarity from the regulator, discussed
below.
- Immediate options for companies include acquiring an NBFC license with RBI approval to issue credit cards, as permitted under the recent RBI norms on Credit Card and Debit Card issuance.
- Co-branded cards, debit, credit, or prepaid, which can be offered by banks or non-banks subject to various applicable rules are another immediate option.
- Future options for credit payments at PoS include
UPI based credit transactions via UPI linked to credit cards (starting with RuPay), which the RBI announced this June, and the Open Credit Enablement Network (OCEN), which will create ‘lending service providers’ with multiple lending partners.
Bank vs non-bank credit lines
The clarification from the RBI raises further questions as to what exactly is permitted. As of today, PPI norms allow PPIs to be loaded through the means listed, that is, cash, debit to bank account, credit cards, debit cards, other PPIs and other payments
instruments issued by regulated entities.
The new clarification from the RBI essentially stops PPIs from being loaded by any means not expressly permitted under the applicable norms. A point of ambiguity here is around what the term ‘credit line’ encompasses. In common parlance, this refers to on-demand
credit offerings, or a preset borrowing limit which the borrower can utilise based on need. These are often unsecured, and may be revolving lines of credit (non-revolving lines are one-time with no reuse once paid off, while revolving lines can be reused repeatedly
until the account/line is closed).
Looking at the RBI clarification, the crux of the RBI’s concern doesn’t seem to be with PPIs being loaded by credit per se. Loading through credit cards, for example, is clearly allowed.
As a result of this, while NBFC provided credit lines are excluded, ambiguity arises with other credit options. For instance, a customer may have an overdraft facility, which is a credit line, that his bank has provided on his existing savings/current account.
Since these hit a bank account first, this would imply that loading a PPI from such a facility should be allowed.
Similarly, the PPI norms, while permitting loading from bank accounts, don’t define the type of bank account, for example, savings/current, or customer/third-party owned. These lead to further ambiguities such as whether loading from the following is allowed,
for example:
- Overdraft and cash credit facilities provided to customers from banks via a separate current account, independent of the customer’s existing savings/current account
- Loading with a fixed tenure loan instead of a revolving line of credit
- Loan accounts which may be third party bank accounts not owned by the customer
- NBFC-P2P lending loans, where lender funds are collected in an escrow account and then disbursed to a borrower, usually a bank account (for example can these instead be disbursed to the PPI directly?)
- Government offered credit lines like the ‘Emergency Credit Line Guarantee Scheme’ (what happens if they reach a bank account first?)
Each of these also present alternate business models for companies in the space, making regulatory clarity on these important for the industry, while also helping customers understand how they can put their wallets to use.
What does this mean for the future of BNPL?
Taking BNPL models specifically, the credit provided works on different business models, for example, some companies treat the BNPL credit offer simply as an advance settlement to the merchant on the customer’s behalf. In other models, a bank/NBFC partner
may offer a loan or a credit line, or the fintech company itself may offer a credit line. It is these, which are based on credit lines that are impacted, while others remain unimpacted.
The regulator’s aim appears to be to prevent such credit offerings from escaping the regulatory purview, and to ensure closer bank scrutiny. The update follows many steps being taken by the RBI aimed at curbing unauthorised digital lending practices, including
notifications, with measures for digital lending apps like asking for adherence to outsourcing norms and
disclosure of digital lending agents on the partner NBFC website.
The RBI also issued a
Report on Digital Lending late last year, making several suggestions from a consumer protection point of view.
Despite this, it is clear that the regulator has not banned BNPL explicity, and only one specific model is impacted. In fact, regulation of BNPL is on the RBI’s agenda, as specified in its latest
Payments Vision Document for 2022-2025.
The Digital Lending Report itself has put forth some suggestions for regulating BNPL, suggesting that instead of acting as secured/unsecured credits going under the guise of deferred payments or the like, these be treated as a part of balance sheet lending.
Incidentally, this report also proposed that loans be disbursed to full KYC PPIs where the borrower doesn’t have a bank account.
Way forward for fintech innovation
The industry has reached out to the regulator for clarity, meanwhile larger questions are emerging on the impact of the step, particularly on the scope for regulatory arbitrage with fintech innovation.
While it is clear that the RBI will be strict with its stance on loopholes, the regulatory support for fintech as well as non-bank driven innovation has been immense, with multiple forward-looking steps including UPI, the regulatory sandbox, and offline
payments being taken, alongside upcoming steps such as enabling IoT/context based payments, and alternative authentication via behavioral biometrics, to name a few, on the agenda. While these are the subject of a separate discussion, payments in fintech innovation
and payments policy development in India are an interesting space to watch.
For a full discussion on the latest policy developments each month, do check out
Cashfree Payments’ Policy Radar.