Do not buy it on BNPL

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By Sandeep Parek

The recent RBI directive prohibiting operators of prepaid payment instruments (PPIs) from charging PPIs with lines of credit has caused a major upheaval in the digital lending industry, leading to widespread confusion among industry players. regarding its scope, applicability and exclusions. PPIs are prepaid instruments such as digital wallets, cards, accounts, etc., which are loaded with money to buy and sell goods and services and to facilitate fund transfers. Banks and non-banking entities meeting the eligibility criteria prescribed by the RBI can provide PPI services after receiving approval or authorization.

Recent years have seen the rise of such digital wallets and prepaid card operators. Many of these PPI operators also offer “buy now, pay later” (BNPL) services, which are essentially lines of credit or predefined borrowing limits that allow customers to access credit when needed up to to the prescribed limit. These are similar to short-term interest-bearing loans with a deferred payment term. While some PPIs partner with banks to offer such lines of credit, others source funds from NBFCs. PPI operators have facilitated small loans ranging from Rs 1,000 to Rs 500,000. However, the June 20 directive prohibits the loading of PPIs with lines of credit and warns operators of criminal consequences for non-compliance. . According to RBI, while PPIs can be loaded with cash, bank account debit, credit card and debit card, the regulatory framework that governs their issuance and operation does not allow them to be loaded with lines. credit. Although the directive is aimed at all authorized non-bank PPIs, it is not clear at this time whether PPIs who partner with banks are also affected. This lack of clarity stems primarily from the fact that the RBI framework currently classifies PPIs as payment systems and does not explicitly allow PPIs to offer credit or loan facilities. In fact, the ban closely follows RBI’s former clarification in December 2020, in which it stated that public lending activities can only be undertaken by banks, registered NBFCs and other statutory bodies regulated by the state government, and had warned the public against unregulated digital lending. platforms promising fast, hassle-free, on-demand loans without adequate collateral. The recent directive also affects credit card challengers, billed as “alternative credit cards”, as currently the framework on credit card issuance also clearly states that only banks and (soon) NBFCs can issue credit cards, with prior approval from RBI.

Although the RBI directive appears to have been issued to enhance customer protection and eliminate cybersecurity risks, it also appears to target risks associated with indirect lines of credit issued by app-based PPI operators, such as hidden costs, lack of accessibility and financial literacy audits, regulatory gaps, etc. Generally, financial institutions are required to comply with strict capital adequacy requirements and KYC checks before issuing loans. In contrast, while some PPI operators may also require their customers to submit their personal information, there is currently no uniform KYC and underwriting standard for these entities. Thus, it appears that RBI is aiming to streamline even small size loans through regular banking channels and stop all operations that may lead to increased risk by allowing unsecured lines of credit, especially for NBFCs.

However, this is not the first time the regulator has taken steps to improve customer protection in the digital lending ecosystem. In January 2021, RBI formed a Digital Lending Task Force through online platforms and mobile apps to secure the digital lending ecosystem without stifling innovation. Regarding loans by PPIs, the group, in its November 2021 report, recommended that although all loans are executed directly on a bank account of the borrower, borrowers with only a PPI account can be disbursed a loan if the account was fully KYC compliant. The group had also recommended that digital lending applications should undergo a verification process by a nodal agency and the development of certain basic technology standards, which would be a prerequisite for offering digital lending solutions.

In the meantime, this guideline aims to minimize possible credit buildup for retail customers (which may ultimately affect the user’s credit rating) and reduce the risk of NPAs on the books of NBFCs and banks. Due to a lack of regulatory oversight and proper KYC checks, there are concerns that loans are being disbursed to people who may not have the means to repay. With rising inflation affecting household purchasing power and amid global health and geopolitical risks, the guideline aims to warn customers against overspending through high-interest loans . There have also been harsh practices including the lack of disclosure of interest rates charged and various registration fees which are waived until the loan is disbursed, not by the seller but by the invisible NBFC.

However, the immediate disruption to BNPL’s services has led several industry players to express concerns about the lack of predictability and uniformity in the fintech regulatory space. The circular does not provide any clarity to existing BNPL clients who have already taken advantage of these credit agreements, providing no grace period for the termination of these agreements. This also negatively affects the customer base of PPI operators, as it is currently unclear whether the regulator would possibly allow these entities to provide lines of credit in the future. Several industry bodies such as the Payment Council of India, the Digital Lenders Association of India and the Fintech Association for Consumer Empowerment have already requested clarification from RBI and a sunset clause of at least one year. This isn’t the first time that issues with fintech apps offering lines of credit have come to the fore. In July 2021, the National Payments Corporation of India reportedly asked fintech start-ups to stop offering lines of credit on the unified payment interface due to non-compliance and user verification risks. Subsequently, the NPCI had sought approval from RBI to allow credit transactions through UPI with an appropriate reporting mechanism.

Until more clarity is provided by the RBI, PPI operators affected by the directive will be required to change their business models or halt their BNPL operations to avoid penalties under the Systems of Information Act 2007. payment and settlement. While financial inclusion is a good goal for have, systemic security and consumer protection issues will need to be addressed before this model is allowed with full disclosures and consequences for misrepresentation.

The author is Managing Partner, Finsec Law Advisors. Co-authored with Rahul Das, Senior Partner, and Sudarshana Basu, Partner, Finsec Law Advisors.


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