Buy now, pay later, prepaid payment instruments are under scrutiny by the RBI

The Reserve Bank of India (RBI) is believed to be looking at buy now pay later (BNPL) services and prepaid payment instruments (PPI) such as wallets.

The central bank is concerned about loading PPIs through credit lines, as this could lead to systemic risks. New era financial players are using credit lines from banks and non-bank financial companies (NBFCs) to load customer wallets. The central bank seems concerned that adequate due diligence is not being carried out while loading PPIs.

The RBI, they pointed out, encourages innovation but it should not be based on regulatory arbitrage.

People familiar with the matter point out that the RBI is not opposed to charging PPI by debit card, cash, bank account debits as it believes that in order to offer a line of credit the entity must have a license . As Fintechs are not allowed to lend, the central bank believes they are not operating within the legal framework. People also said that there are some concerns about data security and privacy, as customer ownership is not always clear.

Earlier this week, the central bank issued a circular prohibiting non-banking institutions or fintech companies from loading lines of credit on PPIs, warning them of heavy penalties if they continue to offer such services. The move came after some fintech companies started using lines of credit from banks or NBFCs to load consumer wallets.

The directive is expected to affect the business models of a growing number of fintech companies, including Slice, PayU’s LazyPay and KreditBee.

Sources said the central bank believes that financial entities that imitate banks (taking over some core functions of banks like credit disbursement) but are not subject to similar strict standards and licensing requirements cannot be allowed to do so. Indeed, if they are allowed to resort to such practices, they will most likely threaten the health of the banking system as a whole and, at the same time, undermine the customer protection mechanism. In this context, the RBI has learned to review these products.

Meanwhile, sources said that some of the industry players are approaching the RBI to offer them up to a year, through some kind of sunset clause, to stop these programs which have become popular, especially after the Covid epidemic.

As reported by FE, the fintech lending industry is likely to ask the RBI to apply a one-year grandfather clause to its new circular prohibiting the loading of wallets with lines of credit. The easing, if allowed, would allow lenders with outstanding prepaid cards to smoothly migrate their existing customers to another mode of issuing credit. The Digital Lenders Association of India and the Fintech Association for Consumer Empowerment are discussing with their members what communications to send to the RBI.

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