On June 20, 2022, the Reserve bank of India ("RBI") issued a letter to all the authorized non-bank prepaid payment instruments ("PPIs"), stating that PPIs must not be loaded through credit lines, as the PPI Master Directions, 2021, do not permit loading of PPIs from credit lines. RBI has further clarified that such practice, if followed, should be stopped immediately, and any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007. This letter raised questions on PPI linked Buy Now Pay Later ("BNPL") business models offering credit lines to the end users.

The Indian fintech sector has witnessed several BNPL models, and in the recent times, there had been a boom of PPI linked BNPL products. Such products typically are facilitated byof arrangements between fintechs involved in digital lending, and banks/NBFCs. In this, the NBFC/bank would provide a credit line to the customer through a PPI, basis which a PPI holder with insufficient balance, was able to get an immediate disbursement from a line sanctioned by a lender, routed to the PPI issuer by way of reloading of the PPI directly or via a nodal account. The money was then used to pay the merchant or at any point of sale, where the user chooses to use its PPI. These transactions took place on a real time basis, and due to the comfort, frequency, and quick turnaround of the process, this tie-up structure had given rise to a wide spread use of PPI aided BNPL products.

The RBI's concerns around PPI linked credit lines stemmed from the principle that a PPI instrument was intended to be used as a payment instrument and not as credit instrument. The PPI linked credit lines tend to operate like shadow credit cards. The repayment schedules, interest rates and terms and conditions of several such products were found to be more akin to that of a credit card than to a simple loan product. However, such products did not require compliance with the regulatory framework for credit cards, as prescribed by RBI. The lack of (i) reporting of defaults, (ii) fair practices linked to interest rates and minimum amounts due and (iii) comprehensive customer grievance redress mechanisms, were some of the regulatory gaps, which the RBI had concerns about, thus leading to the RBI issuing the letter in question. Moreover, the underlying economic concerns were also around consumers being offered credit without any assessment of repayment capabilities, as well as that the availability of easy credit may encourage consumers into borrowing recklessly, in order to buy products, they might not be able to afford, leading to over-indebtedness and repayment defaults.

At the time of its issuance, the RBI letter gave rise to some ambiguity as the letter was addressed to non-bank PPIs, however the basis for non-compliance was cited as the loading restrictions prescribed under the PPI Master Directions, which do not make a distinction between bank PPIs and non-bank PPIs. Hence, it was unclear as to whether banks PPIs can still continue to offer credit lines to customers. The ambiguity also found its basis in the digital lending working group recommendations, which recommended that a loan can be permitted to be disbursed through fully KYC PPIs. Clarity has now been brought in with the recently released RBI framework on digital lending dated August 10, 2022, according to which, all loan disbursals and repayments are required to be executed only between the bank accounts of the borrowers and the regulated entities without any pass-through pool account of the lender service provider or any third party. Thus, it has been indirectly clarified that loan disbursals cannot be made into a PPI in any case, be it a bank or non-bank.

Apart from the requirement of disbursement of loans into the bank accounts of the borrower, the digital lending framework also mandates that any lending sourced through digital lending apps will be required to be reported to Credit Information Companies or CICs, by the regulated entities, irrespective of its nature or tenor. In other words, all short-term/ BNPL loans would now be treated like a loan and would require KYC adherence as well as bureau reporting. This will certainly impact customer experience as there will be stricter controls on fund flows and reporting obligations even for small-ticket BNPL loans.

The RBI letter naturally caused many fintech companies to restructure their PPI linked BNPL products and business models to ensure compliance. While many fintech entities shut down the impacted line of business, others have shifted to certain other alternative BNPL models such as (i) issuing co-branded credit cards in partnership with banks or (ii) offering real-time term loans in place of a revolving credit line, disbursed directly into the account of the PPI holder. Loans and other credit products can be disbursed into a consumer bank account, however such products will arguably be not as convenient as PPIs, as PPIs are usually end-to-end digital, have an easy-to-use consumer interface as well as have the potential for greater product innovation than traditional bank accounts.

To conclude, undoubtedly, the RBI mandate has been well intended from a customer protection perspective and it was imperative to have appropriate regulations around specific concern areas such as (i) ensuring transparency including clear disclosure of all relevant information to the borrowers to enable them to make an informed decision prior to availing any credit facility, and (ii) stricter processes for assessing credit worthiness prior to the dispensation of loans. However, the prescribed compliances and complete prohibition of PPI linked route of offering BNPL products, has in a significant way impacted the availability of easy credit to the large under-served economic section of Indian population, which otherwise did not have access the traditionally available credit products such as bank loans and credit cards. Apart from this, even though prohibition on PPI-linked credit does not technically prohibit the offering of all forms of short-term consumer credit or other forms of BNPL products, it certainly would eventually make the consumer interface more challenging.

Ms. Avisha Gupta, Partner, Luthra and Luthra Law Offices India

Ms. Ananya Mishra, Associate, Luthra and Luthra Law Offices India.

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