RBI examining PPI credit, BNPL models; in talks with fintechs on concerns

The central bank is looking at a framework that can exist without hampering pace of innovation, even as it addresses consumer protection and cyber security concerns

The Reserve Bank of India (RBI) is examining the practices and models of prepaid payment instruments (PPI) and Buy Now Pay Later (BNPL) service providers days after the central bank reiterated its stance that regulated activities that require license cannot be practiced by fintech players, without authorisation, under the garb of innovation.

Earlier this week, the RBI directed non-bank PPI issuers not to load their wallets and cards from credit lines. Fintech players have approached the central bank seeking clarity over its directive, and the RBI is listening to their concerns, said people aware of the matter.

The concerns of Fintech players are being heard by the RBI. However, the RBI is clear that if one regulated entity is allowed to conduct a business with authoritisation and licensing, another entity cannot be allowed to conduct the same activity without a license, in the name of innovation, people quoted above said. The intervention by the RBI was necessary as certain new entities outside its regulatory domain, were perceived as threat to the system.

For PPI loaded from credit lines, there are broadly about three models which the central bank is examining. The first model is similar to that of credit card companies; the second is operator getting a loan and giving it to the PPI holder as card loading; third is PPI holder getting a loan and spending it.

For BNPL, models differ from platform to platform, people quoted above said. As long as BNPL involves loan through an intermediary, these are business loans. However, if the same model involves credit lines and replenishing of the credit line as soon as the payment is made, it is not same as BNPL being used for a high value purchase, people said. Currently, several models are being tagged as BNPL and require intervention of the banking regulator. BNPL cannot be used to mimic credit line or a credit card that only banks are now allowed to issue, people quoted above said.

The central bank will clarify whether bank-led PPIs will be exempted from its directive or existing fintech players can tie up with banks and follow strict KYC, due diligence, and protect consumers’ interest. Any clarification or extension sought to adhere to the RBI’s directive can be framed after discussions with stakeholders, people quoted above said.

The RBI is looking at a framework that can exist without hampering pace of innovation even as it addresses consumer protection and cyber security concerns. The central bank has to ensure that the structure includes the same degree of due diligence followed by banks for credit lines, which is now being compromised.

In one of the cases, a small bank was lending its name to a fintech firm to issue cards, and a non-banking finance company was used for lending. Non-regulated entities were borrowing capabilities of regulated entities and functioning. These new entities that fall outside the regulatory domain, were perceived as a threat to the system, and the intervention by RBI was required, people quoted above said.

RBI’s view is clear that innovation should not be based on regulatory arbitrage

Regulator’s directive against loading PPIs from credit lines was warranted as fintech firms were perceived as threat to the system

RBI holding discussions with fintech firms to address concerns

RBI is looking at a framework that can exist without hampering pace of innovation, and address issues around costumer protection, cyber security