On June 20, 2022, the Reserve Bank of India (RBI) clarified to authorised non-bank prepaid payment instrument (PPI) issuers that PPIs may not be loaded from credit lines, and any such practice should be stopped immediately.
Pursuant to the RBI Master Directions on Prepaid Payment Instruments dated August 27, 2021 (updated as on November 12, 2021) (PPI Master Directions), both banks and non-bank entities (including entities not under the direct supervision of the RBI), may seek approval from the RBI to issue PPIs. The PPI Master Directions also permit co-branding arrangements between banks, non-banks (both banks and non-banks require necessary approval/ authorisation from the RBI in their role as the PPI issuer under the co-branding arrangement), and other companies incorporated in India (which may not require specific approval/ authorisation from the RBI as the roles that a co-branding partner may play with respect to the PPI are limited).
In the event where there is a co-branding arrangement between a bank and a non-bank entity, the bank is required to play the role of the PPI issuer, and the role of the non-bank entity is restricted to: (i) marketing and distribution of the PPIs; and (ii) providing access to the PPI holder to services that are offered. We understand that in the Buy-Now-Pay-Later (BNPL) segment in India, fintech entities widely adopted a business model that involved tying-up with other non-bank or bank wallets/ PPI issuers, wherein an underlying bank or NBFC performed the role of lender/ underwriter to load the PPIs. Prior to the RBI clarification, the prevailing sentiment was that there were no specific restrictions on a third-party bank/ NBFC lender or underwriter undertaking that role.
What is the impact of the clarification?
The current RBI guidance imposes restrictions on the ways non-bank PPIs fund PPIs.. While PPIs issued by non-bank entities were being funded through debits to bank accounts, debit cards and credit cards, clarity eluded such entities on their ability/power to use credit to bank accounts (through overdraft facilities/ credit lines) to fund PPIs. The current clarification restricts funding from credit lines, while continuing to allow PPIs to be funded through credit cards. This may be disruptive to several fintech entities offering Buy-Now-Pay-Later (BNPL) products, specifically non-bank PPI issuers who pre-fund PPIs through proceeds availed from credit lines offered by NBFCs.
Given that the clarification by the RBI has been addressed only to ‘authorised non-bank prepaid payment instrument issuers’, it remains to be seen whether or not the intent of the RBI is to keep open credit lines as a source of funding for PPIs when such PPIs are issued by approved/ authorised banks. Under assumption of such intent, the following outcomes remain possible:
- Banks issuing PPIs may continue to fund the PPIs through credit lines offered by themselves or through other banks (but given restrictions on co-branding arrangements where the bank has to mandatorily play the role of the PPI issuer, it is not clear whether credit lines offered by non-banks will be permitted); but
- Non-banks issuing PPIs will not be permitted to fund PPIs through credit lines offered by themselves, or other non-banks.
It would be a welcome move if the RBI issues clarification on the scope of the expression ‘credit lines’, as this will determine the permitted credit instruments that may be used to fund PPIs.
What next for entities offering BNPL products?
In the event that the RBI intends to differentiate between sources of funding of PPIs issued by banks and non-banks, it may seem contrary to the principle of uniformity across PPI issuers, indicated by the RBI as being important under the RBI Governor’s Statement dated April 7, 2021, pursuant to which cash withdrawal facilities, which were allowed only for full-KYC PPIs issued by banks, were extended to full-KYC PPIs issued by non-banks. The Payments Vision 2025 issued by the RBI on June 17, 2022 also sets out that an increase in PPI transactions by 150% as one of the outcomes during the Vision period, reinforcing RBI’s expectations of the sector.
However, the clarification from the RBI follows other recent restrictions on BNPL business models. Pertinently, under the RBI Master Directions on Credit Card and Debit Card – Issuance and Conduct, dated April 21, 2022 (Credit Card Master Directions), BNPL products (both physical and virtual) that operate as a payment instrument carrying a means of identification (of the user), issued with a pre-approved revolving credit limit, and to be used towards purchase of goods and services, or for drawing cash advances, were to be treated as credit cards. As a result, all thoughts around structuring of BNPL products need to consider that:
(i) If the BNPL product qualifies under the definition of ‘credit cards’ under the Credit Card Master Directions, then the issuing entity must qualify under the eligibility criteria set out by the RBI. In the case of NBFCs, this means that prior approval from the RBI will be required.
(ii) If the BNPL product does not qualify as a ‘credit card’ but as a PPI, then such PPI cannot be funded through credit lines if it is being issued by a non-bank. This may restrict the growth and scale of operations as credit lines from banks and NBFCs cannot be leveraged to fund PPIs. In addition, this also limits the options available to banks and NBFCs to undertake lending activities through certain kinds of BNPL products (i.e. non-bank-issued PPIs).
These regulatory developments contribute to further uncertainties within the fledgling BNPL segment in India, and a clarification by way of guidelines on BNPL as indicated under the RBI’s Payments Vision 2025 document will be welcome.