Ban on loading through credit lines: PPIs call for clarity from RBI

The Reserve Bank of India’s (RBI’s) notification disallowing non-bank prepaid payment instruments (PPIs) from loading their instruments through credit lines has sent industry players into a tizzy.

Most of them are trying to figure out the implications of the notification on their businesses.

They are engaged in a discussion on the contents of the notification and are looking to approach the regulator for further clarification.

An industry body of PPIs has met the regulator to get clarity on the issue and other industry associations are trying to galvanise support and present their views to RBI on this matter.

Opinion is divided over whether or not the circular will impact the popular ‘Buy Now Pay Later (BNPL)’ schemes offered by many fintechs.

In a notification to non-bank PPI issuers on Monday night, which has not been uploaded on the central bank’s website, the RBI said, “The PPI master directions do not permit loading of PPIs from credit lines. Such practice, if followed, should be stopped immediately. Any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007.”

According to 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.

However, the guidelines do not permit credit lines to top up these instruments.

According to a payment industry veteran, the way the circular has been worded, it may create some confusion.

“Certain products have been launched recently around credit, which were driven by NBFCs (non-banking financial companies), and delivered through PPIs. Now, this part is not covered in the guidelines on whether a credit product can be disbursed through PPIs. So, it is a grey area,” the person said.

“Perhaps, there may have been some attempts by PPIs to give disguised credit directly without an NBFC underwriting it that triggered this response from RBI,” the person said.

PPIs are instruments that facilitate purchase of goods and services, conduct of financial services and enabling of remittance facilities, against the value stored therein.

According to the RBI, there are over 35 non-bank PPI issuers in the country, including Amazon Pay, Bajaj Finance, Ola Financial Services, PayU Payments and Phone Pe, among others.

The notification is likely to impact those fintech players or prepaid instrument issuers that offer credit lines to customers via cards and wallets.

Opinion is divided if the circular will impact BNPL players. 

BNPL is essentially a short-term loan product, wherein the lender pays the merchant or service provider at the point-of-sale and the customer can repay the loan at a future date with some charges.

Suresh Ganapathy, associate director, Macquarie Capital, said, “Based on our understanding and interpretation of the circular, it could impact players like Slice and Unicards, who have been adding a lot of customers through this route.”

“The positive impact is naturally on banks with a large credit card base. Also, many were using their BNPL platforms and their PPI licence like loading customer wallets with credit and showing wallet balance…That will now be questioned…For example – PayTM postpaid,” he said.

“BNPL, with direct merchant integrations, does not get impacted because of this notification. It is the card-based EMI products, which may have some impact. The regulator has taken a perspective of consumer protection more than anything else. The pay later options will not get impacted because there was no underlying credit instrument. Pay later is a transactional finance, unless EMI finance comes in,” said Akshay Mehrotra, co-founder & chief executive officer (CEO), EarlySalary.com.

Responding to Business Standard’s query, Rajan Bajaj, founder & CEO, Slice, 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.”  

According to a Macquarie Research note, some of the new generation players were adding closer to 200,000-300,000 cards using PPI licence. They were loading the wallets of consumers using credit lines from NBFCs and banks.

"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," said Sandeep Srinivasa, co-founder, RedCarpet.