The Reserve Bank of India (“RBI”) through a notification dated June 20, 2022, (“Restriction Notification”) directed to all authorised non-bank prepaid payment instrument issuers (“Non-Bank PPIs”) notified that a Prepaid Payment Instrument (“PPI” or “PPI Wallet”) shall not be permitted to load funds through credit lines. Such practice which may be ongoing should be stopped with immediate effect and any non-compliance may attract penal actions under the provisions contained in the Payment and Settlement Systems Act, 2007. The Restriction Notification has not only come as a blow for fin-tech companies who are already operating in the credit business but a setback to those as well who were venturing into this line of business through physical/ virtual co-branded credit cards, credit/ debit card challenger, pre-paid cards to name a few instruments.
It is noteworthy that Master Directions on Prepaid Payment Instruments do permit co-branding arrangements between banks and non-banks in the form of issuers of PPI subject to necessary approval from RBI. There are other fin-tech companies in the market (who may not require explicit approval from RBI) who had tied up with such banks and nonbanks as their co-branding partners and providing credit products to their customers. The Restriction Notification has now created complexity and hit hard the business models of such fin-tech companies who offer Buy Now Pay Later products (“BNPL”) and credit through prepaid cobranded cards by pre-funding customers PPI Wallets through credit lines in partnerships with banks or NBFC’s as lenders. There was no explicit restriction whatsoever on a bank or an NBFC or underwriter undertaking that role of a lender, prior to the Restriction Notification. Those who were allowing customers to avail credit line in their PPI Wallets and making spends by linking need to Unified Payments Interface (UPI) in partnerships with PPI issuers stand affected as well. The extent of this impact on the Indian payments and fintech ecosystem is yet to be ascertained.
While the restriction is placed specifically on credit lines provided by Non-Bank PPIs, loading of a PPI through credit card continues to be permissible. Notable difference between a ‘credit card’ and a ‘credit line’ is that while a credit card is connected to and allows you to access a line of credit, it’s possible to open a line of credit that doesn’t necessarily have a card associated with it. Basically, all credit cards are lines of credit, but not all lines of credit are credit cards. Also, the line of credit is more of a revolving financial product that allows a borrower to borrow money repeatedly which in turn becomes a loan only when the borrower draws down the money.
The Restriction Notification has certainly created chaos in the market, as a result of which Payments Council of India (“PCI”) and several fin-techs have apparently approached Government to seek resolution on disallowing NonBank PPIs from loading credit lines in PPIs. PCI has further requested that those PPIs who comply with full KYC (know your customer) norms should be treated on par with bank accounts and that they should be allowed to disburse credit to consumers. The request also stated that a customer who draws down from a non- revolving credit line (provided by a regulated entity/lender) should be allowed to be disbursed into a full KYC PPI. Non-revolving credit line means a facility where the credit is ‘non replenishable’ unless the customer is underwritten again for a new credit line and has a new repayments schedule with all prior repayments made. This essentially means that the PCI seek reversal of the Restriction Notification.
A detailed set of guidelines on digital lending are still awaited from RBI who, currently in some manner or the other, is regulating and influencing businesses of these fin-techs through regulations in the form of certain notifications (including Restriction Notification), master direction on credit and debit card issuance, release of report prepared by working group on digital lending constituted by RBI itself (even though it comprised of only recommendations and suggestions by the working group), from which RBI is very much likely to pull out and consider recommendations on prohibiting first loss default guarantee (FLDG) (FLDG refers to the practice of credit guarantee provided to a regulated lender by a non-regulated entity or a regulated entity as the case maybe), bringing in self-regulatory organisation (SRO) and digital India trust agency (DITA), digital lending technology and security standards, consumers protection framework to name a few. While these regulatory developments contribute to uncertainties for credit products, and credit line in the fin-tech space, whether such products’ underlining technology is innovative enough, clarification by way of proper guidelines by RBI will be welcome which could provide a clear framework to operate in this industry.
It’s quite evident from a recent statement of the Governor, RBI, that RBI does not intend to crack down on any BNPL based credit product but to promote new ideas which are in the incubation stage and wish to assess the leverage that is there in the system. The Government must come up with a consultation paper to gather and consider views of the ecosystem towards such credit products before framing the said guidelines. Access to credit and that too in a convenient legal and compliant manner is the blood line and lifeline of any economy. In the meanwhile, players in the ecosystem should onboard and continue to serve only full KYC customers on their platforms in partnerships with partner banks and non-bank lenders without falling foul of the regulations including making robust their KYC and Anti Money Laundering (AML) checks and balances and be fully compliant with applicable laws. It is also suggested that existing terms and conditions should be modified to comply with the Restriction Notification by all the players in the ecosystem.
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