Explained: Why RBI stopped credit lines from fintech companies like Simpl and Amazon Pay

The Reserve Bank of India (RBI) has issued a notice prohibiting non-bank prepaid wallets and prepaid cards from loading lines of credit – preset borrowing limits – on these platforms.

This comes against the backdrop of a boom in credit instruments such as fintech-focused credit cards and buy-now-pay-later wallets.

What did RBI say in its notification?

The banking regulator clarified that its primary guideline on prepaid payment instruments (PPIs) does not allow the loading of PPIs from lines of credit – a practice undertaken by several fintech credit card companies. These companies usually partner with banks or NBFCs and offer lines of credit in their prepaid wallets.

“Such a practice, if followed, should be stopped immediately. Any non-compliance in this regard may result in criminal prosecution under the provisions contained in the Payments and Settlement Systems Act 2007,” the RBI noted.

What are PPIs?

The RBI defines Prepaid Payment Instruments (PPIs) as payment instruments that facilitate the purchase of goods and services, including funds transfer, financial services and remittances, for value stored in or on the tool. PUPs come in the form of payment wallets, smart cards, mobile wallets, magnetic chips, vouchers, and more. In accordance with regulations, banks and NBFCs can issue PPI.

What is a line of credit?

A line of credit is a predefined borrowing limit that allows an individual or a business to access credit at any time, according to their needs. It can be operated by the client until the offered limit is not exceeded. It is like a flexible loan as opposed to a lump sum loan where a fixed amount is borrowed.

Why did the RBI issue this notification?

With the infiltration of credit products into the market, the regulator is exerting renewed pressure for enforcement in the interests of consumer safety. While some fintechs partner with banks like SBM Bank, RBL Bank, Federal Bank, etc. to offer these products, some partner with NBFCs. In some cases, credit lines are also extended by NBFC fintech partners. Recently, RBI Governor Shaktikanta Das had said that the regulator will soon release standards to regulate the digital payments space.

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Which fintechs offer credit products in India?

Today, most fintechs offer a credit product in addition to their core offerings. Companies like Paytm, Amazon Pay, LazyPay, Simpl, etc. offer postpaid wallets with small lines of credit. Others like Slice, Uni, Fi, OneCard, etc. offer credit cards in partnership with banks and NBFCs.

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