Amid the boom in credit instruments in the digital payments market, the Reserve Bank of India on Monday (June 20) barred non-banking, prepaid payment instruments (PPIs) such as wallets and prepaid cards, from loading credit lines, which is a preset borrowing limit, on their platforms. Their reasoning being that non-bank institutions cannot load credit lines onto them.
As per existing RBI guidelines, pre-paid instruments are allowed to be loaded using cash, bank accounts, and credit and debit cards. But the guidelines disallow the usage of credit lines to top up these instruments.
What the RBI said in its circular
In a one-page circular, the RBI directed the PPIs to stop the practice immediately.
The regulator said it does not allow loading of PPIs from credit lines. “Such practice, if followed, should be stopped immediately. Any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007,” said the circular.
Why the RBI issued this notification
The RBI’s clarification is being seen as an attempt to stop card-based fintechs and firms operating as neobanks that have tied up with banks from offering credit lines.
For example, companies like Paytm, Amazon Pay, LazyPay, Simpl, etc., offer postpaid wallets with small credit lines. Others such as Slice, Uni, Fi, OneCard, etc., give credit cards in partnership with banks like SBM Bank, RBL Bank, Federal Bank, etc., to offer such products. In some cases, the credit lines are also extended by the fintech’s NBFC partners – all of which had caught the RBI’s attention.
Demystifying PPIs and credit line
PPIs are instruments that allow a person to purchase goods and services, conduct financial services, enable remittance facilities, etc., against the value stored within. According to RBI, there are over 35 non-bank PPI issuers in the country, including the likes of Amazon Pay, Bajaj Finance, Ola Financial Services, PayU Payments Pvt Ltd, Phone Pe Pvt Ltd, among others.
Meanwhile, a customer can draw money from a credit line till the limit offered and cannot go over that amount. It is similar to a flexible loan and not like a fixed loan amount.
Who will be affected?
Some of the new generation fintech players, who were adding thousands of cards using PPI licence and loading the wallets of consumers using credit lines from NBFCs, banks etc, will be affected by the new rule. According to experts, the main purpose of a PPI license was to act as a payment instrument and not as a credit instrument and many fintechs were flouting the norms and using it as a channel to load credit. Many customers were also taking a line of credit through their wallets at the point of check-out without knowing it.