JUN 19-JUN 25

Last week the Reserve Bank of India issued a notification forbidding operating non-bank institutions or fintech companies including many offering ‘buy now, pay later’ (‘BNPL’) services, from loading credit lines onto Prepaid Payment Instruments (PPI) such as wallets and prepaid cards. As per the master directions, PPIs are permitted to be loaded/ reloaded by cash, debit to a bank account, credit and debit cards, PPIs, and other payment instruments issued by regulated entities in India. 

Many fintech companies like Mobikwik, Slice, PayTm, LazyPay  were offering prepaid cards or wallets with the help of banks and NBFCs. These companies were taking a line of credit from banks and NBFC in the name of customers, which the companies with PPI licenses were not allowed to do under the extant PPI norms. Some of the new generation players were adding closer to 200,000-300,000 cards using PPI license and loading the wallets of consumers using credit lines from NBFCs, banks etc. The main purpose of a PPI license is to act as a payment instrument and not as a credit instrument and many FinTechs were using it as a channel to load credit. Many customers were also unknowingly taking a line of credit through their wallets at the point of check-out. Some of these practices haven’t obviously gone down well with the regulator which has prompted the issuance of this circular. RBI’s concerns are seen to be primarily with regards to; 

1. lenders charging exorbitant interest rates
2. lenders requiring minimum know-your-customer details to onboard and coerce customers
3. firms engaging in money laundering 

The circular has thrown the sector into a shock with strong reactions coming in from various fronts. The move has ensued panic and an existential threat to many fintech startups and caused some to compare the decision to China’s crackdown on financial services firms last year. Here are some of the reactions from the Industry:

 “All buy now pay later products in India work on PPI. And, the whole fintech lending ecosystem in India works on the principle of credit lines through wallets and built on top of PPIs. If this notification is binding on everyone, then what the RBI is essentially saying is, if you are not a bank you cannot lend on any digital payment mode. This is a very drastic read of the situation. The conclusion we can draw is RBI is saying “do not give an infinite line of credit when you are disbursing to PPIs”, said Sandeep Srinivasa, Co-founder, RedCarpet.

“We believe this regulation could significantly impact the FinTechs involved in this business and would be advantageous to banks, as they can further accelerate card acquisition with less competition,” analysts at brokerage house Macquarie wrote earlier this week.

“The rule is very confusing and strange,” said a fintech founder on condition of anonymity to avoid upsetting RBI officials. “What the RBI is essentially saying here is don’t load credit line on PPI. The way things work with PPI currently is that the money finally goes to merchants. You’re saying now that NBFCs can’t give credit lines to merchants and their money should only be routed to bank accounts of customers”, says a Fintech founder who prefers to remain anonymous. The founder added that this new stance risks erasing all the innovation that has happened in the past five years in the fintech industry, which has attracted over $15 billion in investments in the last two years from scores of high-profile backers including Sequoia India and Southeast Asia, Tiger Global, Insight Partners, Accel and Lightspeed Venture Partners.

The bottomline is this – irrespective of RBI’s reasons for clamping down on fintech players offering PPI lines as a credit instrument,  investors are getting spooked and many startups that are in the middle of raising new funding rounds are beginning to see some VCs back out, according to people familiar with the matter. 

Additional new directives from RBI

RBI extended certain compliance deadlines for banks and card issuing companies providing credit and debit cards till october 1st 2022.

The following provisions of the Master Direction in issuing of debit and credit card has been issued: 

• If the credit card holder hasn’t activated the card for more than 30 days of issuance, the card issuer must request for OTP based consent from the cardholder for activating a credit card.
• Card-issuers must ensure that the credit limit is not increased at any point without taking explicit consent from cardholder’s 
• No capitalization of unpaid charges/levies/taxes for charging/ compounding of interest. 

However no extension has been provided to provisions related to co-branding, which limit the role of co-branding entities to marketing and distribution of credit or prepaid cards. This provision, which will come into effect from July 1, 2022, says that the co-branding partner shall not have access to information relating to transactions undertaken through the card. 

RBI also proposed norms for the outsourcing of IT services to ring-fence banks and other regulated entities from financial, operational and reputational risks. According to RBI’s draft Master Direction on Outsourcing of Information Technology (IT) Services, the RBI proposed Regulated entities (REs) will not require prior approval from the central bank for the outsourcing of IT and IT-enabled services, According to RBI,the increasing dependence of customers on digital channels to avail banking services makes it imperative for regulated entities to focus on operational resilience.

Outsourcing of any activity of the RE shall not diminish its obligations as also of its board and senior management, who shall be ultimately responsible for the outsourced activity,” the RBI said in a master circular. Also banks, payment banks, cooperative banks, credit information companies, NBFCs and other regulated entities, would be required to put in place a comprehensive board-approved IT outsourcing policy.