Explainer: Why RBI is not okay with fintech PPIs\' credit lines from non-banks
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On Monday, the Reserve Bank of India said prepaid payment instruments (PPIs) must not be loaded through credit lines from non-bank lenders, sending the wallet and buy-now-pay-later industry into confusion. Mint explains the RBI circular and the impact on fintech companies. 

What does the circular say?

Some fintechs in India tie up with banks to issue prepaid cards. Some other fintechs, however, tie up with an NBFC, (or use their own NBFC) to offer a credit line, which is used to load the customer’s card with money. RBI’s 20 June circular said that under its master directions, PPIs such as wallets cannot be loaded using credit lines issued by non-bank lenders. The central bank said any such practice, if followed, should be stopped immediately and non-compliance may attract penal action under the Payment and Settlement Systems Act, 2007. The latest circular says clearly that PPI can be loaded using debit card/credit card but not with a credit line from an NBFC.  

What is RBI’s concern?

Using credit lines to top up prepaid cards was becoming a popular way among fintechs to operate in the Buy Now, Pay Later (BNPL) segment. The central bank is not pleased with this arrangement and is clear about the fact that a PPI (a payments instrument) cannot be used as credit instrument. There seems to be concerns about the growing emergence of some of these fintechs who have been aggressively extending unsecured lines of credit in various forms, increasing the risk in the system. “Fintechs have been using a PPI BIN (a bank identification number) to do a quasi-credit card literally, and RBI is not okay with it,” a top banker said.

Why did the circular create confusion?

The circular is addressed to “all authorized non-bank PPI issuers”. This has created some confusion in the industry. Many believe that fintechs who offer credit lines on a bank’s PPI are not impacted. However, some say the master directions disallowed even banks from doing it, but people were still doing it. “So, when you put the master directions and this circular together, then both bank and non-bank PPIs cannot be loaded with a credit line,” a neobank founder said. 

Which companies will be impacted? 

An NBFC founder, who three weeks ago stopped issuing prepaid cards that they used to load with credit line after meeting the regulators, said, “RBI is very clear that they don’t want any credit card or a surrogate product run without RBI approval.” The move spells trouble for NBFC credit line-linked wallets and prepaid cards that allowed BNPL, including Slice, Uni, LazyPay, PostPe, MobiKwik, Ola Postpaid, EarlySalary, and some neobanks. SBM Bank was one of the preferred PPI issuers to fintech companies, while M2P is another company which helped many of these prepaid card fintechs connect to banks’ PPIs.

What’s next for PPI fintechs?

While some people in the industry are still in denial, some have already started searching for workarounds. The neobank founder explains, “A fintech can still do aggressive lending and transfer the loan to your bank account. The next step could be linking a prepaid card with your bank account and now you can take out the money, load your card, and swipe it at a merchant.” The user experience will change, and some customers will drop off, but this is still a workable hack, he said. In the last one year, RBI has sent clear signals that it is watching the sector closely. But fintechs flush with capital might find a hack for their survival. 

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