INTRODUCTION
The Reserve Bank of India (hereinafter referred to as “RBI”) laid down a policy for Prepaid Payment Instruments (hereinafter referred to as “PPIs”), which include wallets and prepaid cards. According to the RBI’s recent notification, Non-banking institutions cannot load credit lines into PPIs.
The Fintech companies who provide credit lines in collaboration with Non-Banking Financial Institutions (hereinafter “NBFCs”) are likely to be impacted by this decision. PPIs make it easier to conduct financial activities and make purchases of products and services.
The RBI vide the said Notification CO. DPSS. OVRST. No. S5380/06-07-004/2022-23 dated 20.06.2022 imposed a ban on PPIs being loaded from credit lines. The penalty of violation of such a ban would attract a penalty under the Payment and Settlement Systems Act, 2007.
Nonetheless, the PPIs can be loaded/reloaded using cash, debit from bank accounts, credit cards, and debit cards, the RBI has only issued warnings to non-bank PPI issuers. There are about 37 non-bank PPI providers, including, among others, Bajaj Finance, Amazon Pay, and Phone Pe.
CONCEPTUALIZING PREPAID PAYMENT INSTRUMENTS
The payment instruments such as PPIs, enable the purchase of goods and services, including the transfer of funds, financial services, and remittances, against the value stored within or on the instrument.
The value stored in the instrument reflects the value that is already paid by the holder or the instrument using any method, including cash, debit from a bank account, credit card, or even from other PPIs. PPIs can appear as, among other things, payment wallets, smart cards, magnetic chips, and mobile wallets. Therefore, any device that provides access to a prepaid amount can be considered a PPI.
It is safe to say that PPIs are tools that make easy payments for products and services, financial transactions, remittance services, etc. using the stored value. As per RBI, there exist more than 35 non-bank PPI issuers, including companies like Amazon Pay, Bajaj Finance, Ola Financial Services, PayU Payments Pvt., and many others.
LINE OF CREDIT
A credit line, commonly referred to as a “line of credit” (hereinafter referred to as “LOC”), is a sort of standing loan that enables persons, corporations, or other organizations to borrow money as needed, return it, and keep borrowing without requesting for a new loan. Hence, it is also called as an “evergreen loan”.
A credit line is a predetermined borrowing cap that allows a person or corporation access to credit whenever they need it, as per the borrowing cap. In comparison to a lump-sum loan, where a fixed amount is borrowed, it is similar to a flexible loan, wherein the required amount can be borrowed.
A line of credit is an accessible, unsecured source of money that can be utilised for both personal and professional purposes. The borrower has two options for withdrawing money out of the line of credit loan account: bank transfers or line of credit checks. During the loan term, each borrower can borrow money as per requirement within the credit limit.
The withdrawn loan must be paid back along with interest on the remaining debt following the lender’s conditions and a predetermined repayment limit based on the borrower’s usage pattern and credit profile.
EFFICIENT REGULATION OF PPI
The Payment Council of India (hereinafter abbreviated to as “PCI”) clarified the various PPI usage patterns for disbursing loans to customers. According to the report, disbursing loans via wallet or PPI enables lenders to control their spending as opposed to risking misuse in cash.
The current loan disbursement procedure via a PPI has increased financial inclusion and accelerated the transition to a cashless society. The prohibition against filling wallets with credit lines, according to RBI applies to both bank and non-bank PPI products. Under the requirements of the Payment and Settlement Systems Act, 2007, any non-compliance in this regard may result in penalties.
Most likely affected by the RBI’s regulation are credit card businesses like Tiger Global-backed unicorn Slice and Uni Cards.
The distribution of loans via a wallet or PPI provides a better view of the usage of the loan as opposed to the risk of misuse if it is distributed in cash and the usage of a PPI, similar to a card, is limited to merchant category codes that are approved and assigned by card networks such as Visa, Mastercard, and RuPay. This makes it easier for an NBFC to ensure that the loan is being used for what it was intended for.
The number of issued and active cards and the amount of processed payments are well over 10 million where a credit line is distributed into a PPI wallet for May is over Rs 3,500 crore.
ANALYSING THE NOTIFICATION
The RBI has imposed restrictions in view of ensuring consumer safety that may be jeopardized as a result of multiple loan options available in market. Some of the fintech companies collaborate with banks while others partner with NBFCs. The NBFC partners of the fintech company may also provide credit lines in particular circumstances.
Moreover, RBI has clarified that loading PPIs from credit lines, a technique used by some fintech credit card businesses is prohibited. The fintech companies along with the NBFCs or banks offer prepaid wallets. Such actions would be penalized under the Payment and Settlement Act, 2007.
The RBI has imposed this restriction with the view that every company needs a license to extend a line of credit, and as the fintech companies lack the license to lend, such lending would be illegal. Moreover, there are concerns of data privacy and security.
The NBFCs are not banks per se as the regulations and licensing requirements are not strictly applicable to them. Hence, permission to the NBFCs would endanger the economic stability of the financial system and would also undermine consumer safety.
IMPACT ASSESSMENT OF THE CIRCULAR
This RBI circular is likely to have an impact on fintech companies that work with NBFCs to issue credit lines to customers via their wallets. Fintech companies issuing prepaid cards in collaboration with a banking partner or a non-banking partner might also be impacted.
The Master Circular shall be read along with the new guidelines issued, as it clearly depicts the RBI’s intention to engage banks in core banking activities. Moreover, banks shall also be kept in charge of everything involving consumer data or Know your Customer (hereinafter “KYC”).
Some of the fintech companies were exploiting this as a route to load credit when the primary function of a PPI license is to act as a payment instrument and not a credit instrument.
However, aside from a few major businesses, the impact would be minimal, even if it may reduce the prevalence of credit-related products in the nation.
Hence, as the fintech companies lend in diverse sectors, there would not be a greater adverse impact. As the notification applies only to card-based goods, it is not clear whether areas like merchant-integrated BNPL and cash loan-based loans will be affected.
PAYMENT VISION 2025- ARCHITECT OF PAYMENT INFRASTRUCTURE
The RBI addressed the need for a regulation on BigTechs and FinTechs to be included in its newly issued Payments Vision 2025 whitepaper. The vision statement also emphasised on the evolution of BNPL services into a new payment method in addition to the cards, UPI, and online banking that were already in use.
In the past few years, India’s progress with payment systems has been spectacular. The Payments Vision 2025 aims to significantly advance the payment infrastructure so that customers are empowered with convenient, low-cost payment choices that are available anytime.
As time goes on, simultaneous growth in the range of available digital payment choices will ensure the RBI’s regulation of providing consumers with a smooth digital payment experience. Hence, this will strengthen India’s status as the world leader in the field of digital payments.
The Payments Vision 2025 statement also aims to handle potential risks emerging out of any unfavourable situation that may happen, taking into account the present geopolitical trends around the world.
The five anchor goals namely- Integrity, Inclusion, Innovation, Institutionalization, and Internationalization are articulated in the Payments Vision 2025 document. The key to surviving and recovering from the changing threat landscape would continue to be resilience to operational and security problems. For the sake of supporting customer confidence, the integrity of payment systems must be uncompromising.
There has been a 50 percent increase in mobile banking users, suggesting the incorporation of first-time users into the digital fold, in line with the change/shift in customer behaviour towards embracing digital and touchless ways of payments, which is partially attributable to the COVID-19 pandemic. The task of making this a permanent change would be pursued, leading to the eventual search for practical and customized payment options.
This would further help in rapid International payments and would enhance international trade with other countries by lowering the cost and duration of remittances. This would increase the proportion of digital payments in the GDP and help to increase transaction transparency.
AMLEGALS REMARKS
The subject RBI notification would have a huge impact on the fintech companies in India as well as the companies, across the world, which are involved in such transactions in India. It shall not be a surprise if the fintech companies ask for a time period, wherein an extension is provided to implement the notification.
The notification would also impact the NBFCs, as the lending would be affected. The notification imposes stricter regulations on the Fintech companies mandating the KYCs of the customers as well as including other intricacies. This would in turn make credit lending expensive as they would have to follow a lot of regulatory compliances.
Hence, the circular aims at making the credit facility by the fintech companies secured and safe, at the same time restricting the developing sector in India.
The blanket ban on the PPIs by the RBI circular may also result in a change in the structure of the business models of the fintech companies involved in credit lending. It shall be an interesting development originating out of the notification.
-Team AMLEGALS, assisted by Mr. Saksham Trivedi (Intern)
For any query or feedback, please feel free to get in touch with tanmay.banthia@amlegals.com or prarthana@amlegals.com.
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