Decoded: The tizzy over RBI's ban on loading PPIs from credit lines

Earlier this week, a Reserve Bank of India (RBI) notification shook the fintech industry. The RBI said the master directions on prepaid payment instruments (PPIs) do not permit loading of PPIs from credit lines. There is a lot of confusion among players regarding the contents of the notification, and various industry associations are looking to approach the regulator to get clarity on the matter.  

What are PPIs?

PPIs are instruments that facilitate the purchase of goods and services, conduct of financial services, enable remittance facilities, etc., against the value stored in them. As of April 5, 2021, the RBI has permitted 57 banks to issue and operate PPIs in India. Besides these, there are over 35 non-bank PPI issuers in the country, including the likes of Amazon Pay, Bajaj Finance, Ola Financial Services, PayU Payments Pvt Ltd, PhonePe Pvt Ltd, among others.

What is the RBI’s concern?

According to the RBI, PPIs can be loaded/reloaded by cash, debit to a bank account, credit and debit cards, PPIs (as permitted from time to time) and other payment instruments issued by entities regulated in India and in Indian rupees (INR) only. On Monday, the RBI sent a letter to some non-bank PPI issuers stating that the PPI master directions do not permit the loading of PPIs from credit lines. Such practice, if followed, should be stopped immediately. And that non-compliance may attract penal action under the provisions of the Payment and Settlement Systems Act, 2007.

Experts said fintech players had launched certain products around credit that were driven by non-banking financial companies (NBFCs) and delivered through PPIs. Whether a credit product can be disbursed through PPIs is not specified in the Master Directions on PPIs, so it is a grey area. This is what, perhaps, triggered the RBI move. Essentially, the central bank is miffed with new-age players extending credit lines through cards as a substitute to credit cards.

What will be the impact of the RBI’s notification?

The notification is expected to hurt those players who were giving credit lines on prepaid cards. According to a Macquarie Research report, it could impact players like Slice, Uni Cards etc. who have been adding a lot of customers through this route. “Some of the new-generation players were adding close to 200,000-300,000 cards using PPI licences, and loading the wallets of consumers using credit lines from NBFCs, banks, etc. The main purpose of a PPI licence is to act as a payment instrument and not as a credit instrument, and we believe many fintechs were using this as a channel to load credit,” the research note said.

Responding to Business Standard’s query, Rajan Bajaj, founder and CEO, Slice, had said, “We are committed to be on the right side of regulation in letter and spirit and are working with our partner bank on this.” 

Opinions vary on how the RBI notification may impact the BNPL (buy now pay later) products prevalent in the market. An industry player, who did not wish to be named, said while card-based EMI products may be impacted, pay later options wouldn’t be because there was no underlying credit instrument. Pay later is a transactional finance, unless EMI finance comes in. “BNPL with direct merchant integrations does not get impacted because of this notification,” he said.

According to Sugandh Saxena, CEO, Fintech Association for Consumer Empowerment (FACE), in the last 18 months or so, some fintech lending companies have leveraged PPI partnerships to facilitate credit to customers through cards. Given the enormous diversity within fintech lending, our understanding is the impact is limited to a much smaller set of players, she said.

What is the confusion regarding the circular?

Several experts said the notification was for non-bank PPI issuers, so there is ambiguity around whether bank-led PPIs will be exempted from this. “Since the RBI communication is to non-bank PPIs, it is unclear if these are applicable to bank-led PPIs,” Saxena said.

Nomura has, in its research note, said that if the RBI is making a distinction between bank-issued PPIs and non-bank-issued PPIs, then the business models of SliceIt, Uni, and PostPe will not see any restrictions because all three are doing their business on bank-issued PPIs, and the circular is addressed to non-bank issued PPIs.

Others differ. Vishwas Patel, chairman, Payments Council of India, told Macquarie Research that according to his understanding, the RBI’s ban on loading PPIs with credit lines is all-inclusive and is applicable to both bank and non-bank PPI products. His assessment is based on clarifications provided by the regulator on queries from certain fintechs. The ban jeopardises several fintech BNPL business models that rely on this mechanism to provide payments-based credit.

What is the industry planning to do?

Saxena said the market intends to reach out to the RBI to present the value proposition of the models, understand its perspectives and concerns, and fully align with regulatory expectations. The industry is engaged in discussion over the contents of the notification and is looking to approach the regulator for further clarification. An industry body of PPIs has already met the regulator to get clarity on the issue, and other industry associations are trying to galvanise support and present their views to the RBI on the matter. Opinion is divided on whether the circular will impact the popular BNPL schemes, which many fintechs offer.

What are RBI’s intentions regarding the fintech sector?

In its annual report for 2021-22, the RBI expressed its intent to bring regulatory order to the fintech space. “The central bank, while encouraging innovation, is also factoring in the emerging risks in the fintech segment. Greater use of technology accentuates the concerns related to cyber security,” RBI said.

Fintechs have disrupted the financial services space in terms of products, customer servicing, back-end analytics, and delivery of services. “…such innovation first disrupts the market and once it establishes its constructive role, the regulators and authorities step in to regulate the space to nurture the innovation in a sustainable manner and to also mitigate any associated risks,” RBI said. Further, in its vision document for the payments space, released last week, the RBI said it will attempt to regulate fintechs in the payments space.