The Reserve Bank of India (RBI) issued directions on Jun 20, 2022, for all non-bank Prepaid Payment Instrument (PPI) issuers to stop loading their PPIs through credit lines. This was aimed at the availability of several PPI credit-linked products offered in partnership with the banks and NBFCs. This significant decision can be considered the result of rising concerns over PPIs and card-based credit services being loaded through various lines of credit.
The new-age fintech firms in India use line of credit from both banks and NBFCs to allow the loading of customer wallets. The apex court in India is apprehensive of the lack of due diligence before PPI loading, which could result in systemic risk.
What Does It Mean for Indian Fintech Firms?
Since the time the new directive has been issued, several fintech firms in India went into a tizzy and have stopped their respective PPIs temporarily. They cannot offer PPIs without asking for prior approval from the RBI. However, customers can continue loading their wallets with cash. While the RBI direction refers to the PPI loading through credit lines, the regulatory intent seems to result in the prohibition of all PPI-linked credit products. Still, there is uncertainty over the treatment of the bank-issued PPI credit products.
RBI’s Key Concern with PPI-linked Credit Lines
Many of the PPI-linked credit lines have been operating like shadow credit cards. Their primary features like interest rates, terms/conditions, and repayment schedules closely resemble a credit card more than a loan product. However, they do not comply with the regulatory requirements for credit cards. The existing lack of reporting of defaults, interest rate setting practices, and customer grievance redressal mechanism are some of the gaps found by RBI.
To tackle this, the RBI has closely reviewed fintech credit products since the last one and half year before issuing the PPI guidelines in June 2022.
The ban of PPI-linked credit offerings does not prohibit all forms of short-term consumer credit or BNPL products in the market. While loans can be disbursed into the bank account of a consumer, they lack the convenience that comes with a PPI which is completely digital and has a consumer-friendly interface. Since the time RBI permitted increased transaction limits, various PPIs have been functioning as low-value, quasi-bank accounts. The recent prohibitions directed towards PPI issuers will most likely limit how the PPIs currently function.
The Way Ahead
Regulating fintech offerings calls for maintaining a fine balance between consumer protection while also addressing the concerns related to systemic risk to further foster innovation and growth. RBI’s recent PPI guidelines have an eye towards higher supervision and licensing of fintech products. With the increasing adoption of a wide variety of fintech products, more such regulations will be needed to set the right standards and protect data. It is with time that we will witness whether the fintech financial products require further regulatory frameworks.