What does the movement of RBI’s line of credit for BNPL’s innovation mean?
The Reserve Bank of India (RBI) recently issued an internal clarification that
prepaid payment instruments (PPI), such as mobile wallets and prepaid cards, cannot be loaded via credit lines. The clarification affects some fintech models in India, including many buy-it-now, pay-later (BNPL) offers and new-era “challenger credit cards”. A common model for these includes prepaid cards offered by fintech, which were backed by a line of credit from a non-bank financial company (NBFC).
Media reports have revealed that fintech firms in India are already withdrawing their offers, even as the industry searches for alternative routes and has contacted the regulator for clarity on what is allowed and what is not. authorized. The clarification also opened up discussion about the future of BNPL itself, as well as broader questions about what this milestone means for fintech innovation in the country.
Options and impact for BNPL companies
PPIs in India are governed by the RBI regulations, known as the Prepaid Payment Instrument Core Guidelines (PPI standards). While the circular (recently clarifying the PPI standards) only addresses issuers of non-bank PPI, the clarification applies to all PPI, including PPI issued by banks, thus affecting both. Thus, BNPL offers from banks or fintechs, challenger credit cards from neobanks, and even postpaid facilities via wallets using this route are all also impacted. Given this impact, the fintechs concerned are exploring other options:
- Credit options to load PPI outside of lines of credit, such as bank overdraft facilities on existing bank accounts or issuance of actual loans by regulated entities, may be possible, but this requires further clarity of the part of the regulator, as indicated below.
- Immediate options for businesses include acquiring an NBFC license with RBI approval to issue credit cards, as permitted by recent RBI standards on credit and debit card issuance.
- Another immediate option is co-branded, debit, credit or prepaid cards, which may be offered by banks or non-banks subject to various applicable rules.
- Future options for point-of-sale credit payments include UPI-based credit transactions via UPI linked to credit cards (starting with RuPay), which the RBI announced in June, and the Open Credit Enablement Network ( OCEN), which will create ‘lending service providers’ with multiple lending partners.
Bank vs non-bank lines of credit
The RBI’s clarification raises further questions as to what exactly is allowed. As of today, PPI standards allow charging PUPs through the listed means, i.e. cash, bank account debit, credit cards, debit cards, other PUPs and other PUPs. other payment instruments issued by regulated entities.
The new RBI clarification essentially prevents the loading of PPIs by any means not expressly permitted by the applicable standards. A point of ambiguity here concerns what is covered by the term “line of credit”. In common parlance, these are credit offers on demand or a predefined borrowing limit that the borrower can use according to his needs. These are often unsecured and can be revolving lines of credit (non-revolving lines are one-time and cannot be reused once paid off, while revolving lines can be reused multiple times until the account is closed/ of the line).
Looking at the RBI’s clarification, the core of the RBI’s concern does not appear to be credit loading of IPPs per se. Charging by credit card, for example, is clearly permitted.
As a result, although lines of credit provided by NBFC are excluded, ambiguity arises with other credit options. For example, a customer may have an overdraft facility, which is a line of credit, that their bank has provided to their existing savings/checking account. Since these first hit a bank account, this would imply that loading a PUP from such an installation should be allowed.
Similarly, the PPI standards, while allowing loading from bank accounts, do not define the type of bank account, for example, savings/current, or customer/third party. These lead to further ambiguities such as whether loading from the following is allowed, for example:
- Cash overdraft and credit facilities provided to customers by banks through a separate checking account, independent of the customer’s existing savings/checking account
- Load with a fixed term loan instead of a revolving line of credit
- Loan accounts which may be third-party bank accounts not belonging to the customer
- NBFC-P2P lending loans, where funds from the lender are collected in an escrow account and then disbursed to a borrower, usually a bank account (e.g. can they be disbursed directly to the PPI?)
- The government has offered lines of credit like the “Emergency Line of Credit Guarantee Scheme” (what if they access a bank account first?)
Each of them also showcases alternative business models for companies in the space, making regulatory clarity important for the industry, while helping clients understand how they can use their portfolio.
What does this mean for the future of the BNPL?
Taking the BNPL models specifically, the credit provided works on different business models, for example, some companies treat the offer of BNPL credit simply as an early settlement to the merchant on behalf of the customer. In other models, a banking/NBFC partner may offer a loan or line of credit, or the fintech company itself may offer a line of credit. It is these, which rely on credit lines, that are impacted, while the others remain unaffected.
The objective of the regulator seems to be to prevent these credit offers from escaping regulatory control and to ensure tighter banking supervision. The update follows numerous measures taken by the RBI aimed at curbing unauthorized digital lending practices, including notifications, with measures for digital lending applications like requesting compliance with outsourcing standards and the disclosure of digital loan officers on NBFC’s partner website.
The RBI also released a report on digital lending late last year, making several suggestions from a consumer protection perspective.
Despite this, it is clear that the regulator has not explicitly banned the BNPL, and that only one specific model is impacted. Indeed, regulation of the BNPL is on the agenda of the RBI, as detailed in its latest Payments Vision Document for 2022-2025.
The Digital Lending Report itself put forward some suggestions for regulating the BNPL, suggesting that instead of acting as secured/unsecured credits under the guise of deferred payments or the like, these be treated as part of balance sheet loans. Incidentally, this report also proposed that loans be disbursed at full KYC PPIs when the borrower does not have a bank account.
The way forward for fintech innovation
The industry has reached out to the regulator for clarity, as bigger questions emerge over the impact of this step, particularly the scope of regulatory arbitrage with fintech innovation.
While it is clear that the RBI will be strict with its stance on loopholes, regulatory support for fintech as well as non-banking innovation has been immense, with multiple forward-looking steps including UPI, 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 -unes, on the agenda. While these are discussed separately, payments in fintech innovation and payment policy development in India is an interesting area to watch.
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