RBI takes credit for curbing PPI funding

OOn June 20, 2022, the Reserve Bank of India (RBI) issued instructions to all non-bank issuers of prepaid payment instruments (PPIs) that charging PPIs through lines of credit was not permitted (PPI credit circular). This clarification targeted the various credit-related PPI products offered by PPI issuers in partnership with banks and non-bank financial companies (NBFCs).

There are several variations of these products on the market, some of which offer a single loan credit to the PPI to be repaid within the agreed time frame with no specific end use, a pre-approved line of credit that can be drawn down as needed, most commonly used to buy now, pay later (BNPL), or a one-time advance charged to the PPI for a specific end use. The RBI management only refers to loading PPIs through credit lines, but the regulatory intent seems to prohibit all PPI-related credit products. This position is reflected in paragraph 7.5 of the PPI General Instructions, which the RBI refers to in the PPI Credit Circular. Section 7.5 states that IPPs can be loaded and reloaded using cash, bank account debits, and credit and debit cards, which implies that IPPs cannot be loaded using lines of credit , loans or advances.

Shilpa Mankar Ahluwalia
Partner
Shardul Amarchan
Mangaldas & Cie

The PPI Credit Circular appears to be aimed at non-bank PPI issuers, but there is uncertainty as to how PPI credit products issued by banks will be treated in the future, particularly given the emphasis put by the RBI on paragraph 7.5 of the main instructions.

One of the RBI’s main concerns was that many of the PPI-linked credit lines were operating as phantom credit cards. The repayment schedules, interest rates and terms of many of these products are arguably closer to those of a credit card than a simple loan product. However, the products do not comply with the credit card regulatory framework. Lack of reporting of defaults, fair practices related to interest rates and minimum amounts due, and comprehensive mechanisms for resolving customer complaints and dealing with fraudulent transactions are likely some of the regulatory shortcomings that concern the RBI.

The RBI, over the past 18 months, has taken a close look at fintech credit products. In November 2021, the RBI’s Digital Lending Task Force released its report, which flagged concerns not dissimilar to those the RBI sought to address in its PPI Credit Circular. These concerns related to regulatory arbitrage and the systemic risk created by parties offering credit, in this case through credit cards, outside the prescribed regulatory framework. While each of these concerns is valid, an important question is whether prohibition is a preferred solution to regulation. The RBI has recently issued updated guidelines on the issuance and operation of credit and debit cards. One option could have been for the RBI to regulate PPI-related credit products under the same framework.

Prohibiting PPI-linked credit does not technically prohibit the offering of all forms of short-term consumer credit or BNPL products, but it certainly makes it more difficult to interface with the consumer. Loans and other credit products can be disbursed to a consumer bank account, but these products lack the convenience factor of a PPI. PPIs are typically end-to-end digital, have an easy-to-use customer interface, and have the potential for greater product innovation than traditional bank accounts. Since the RBI allowed cash withdrawals and increased transaction limits, PPIs have been able to function as low-value quasi-bank accounts and can increase financial access given their ease of issuance and operation. Prohibiting PUP issuers from entering the credit segment will limit the functionality of all PUPs.

Fintech regulation requires the right balance between protecting consumers and addressing systemic risks, while still fostering growth and innovation. The RBI’s recent approach has been towards licensing and increased oversight, pushing fintech products towards more traditional regulation. As adoption of fintech products increases, stronger regulation is certainly needed to set standards, introduce regulatory oversight, ensure data protection and build consumer trust. However, it may be worth considering whether fintech-based financial products require a completely separate regulatory framework.

Shilpa Mankar Ahluwalia is a partner at Shardul Amarchand Mangaldas & Co.

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