Buy Now Pay Later Loan Prepaid Payment Instruments Under RBI Investigation

The Reserve Bank of India’s (RBI) is said to be investigating “buy now pay later” (BNPL) services and prepaid payment instruments (PPIs) such as wallets.

The central bank is concerned that PPIs are loaded through credit lines as this could create systemic risk. New age financial players have used lines of credit from banks and non-bank financial firms (NBFCs) to charge customers’ wallets. The central bank appears to be concerned that adequate due diligence may not be taking place while the PPIs are being loaded.

The RBI, they emphasized, encourages innovation but should not be based on regulatory arbitrage.

Persons familiar with the matter point out that the RBI does not object to PPIs being loaded with debit card, cash, bank statements, as it believes the entity needs a license to provide a line of credit. to offer. Because fintechs are not licensed to borrow, they do not operate within the legal framework, according to the central bank. The individuals also said there are some concerns about data security and privacy because customer ownership is not always clear.

Earlier this week, the central bank issued a circular banning non-banking institutions or fintech companies from loading credit lines on PPIs, warning them of heavy fines if they continue to offer such services. The move came after a number of fintech firms began using lines of credit from banks or NBFCs to fill consumers’ 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 impersonate banks (by performing certain core functions of banks such as credit disbursements), but are not subject to similarly rigorous standards and licensing requirements, should not do so. This is because if they are allowed to resort to such practices, they will most likely threaten the health of the wider banking system while undermining the customer protection mechanism. Against this background, the RBI has learned to investigate such products.

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

As reported by FE, the fintech lending industry will likely request the RBI to apply a one-year grandfather clause to its new circular, which prohibits the loading of portfolios with lines of credit. The easing, if allowed, would allow lenders with prepaid card-based outstandings to smoothly migrate their existing customers to another mode of credit issuance. Digital Lenders Association of India and Fintech Association for Consumer Empowerment are holding discussions with their members about the communications to be sent to the RBI.

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