Explained: RBI's New Rule To Buy Now, Pay Later, But Without Credit Lines

In a significant move that could affect a number of fintech players, the Reserve Bank of India on Monday (21 June) directed the non-bank prepaid payment instruments (PPIs) to not load their PPI instruments - wallets and prepaid cards - through credit lines.

The RBI's decision comes after the central bank held widespread discussions with the industry stakeholders as it seeks to understand the business models of lending startups, including credit-card based fintech, while aiming to release digital lending norms by July this year, reports Economic Times.

The banking regulator has clarified that its master direction on prepaid payment instruments (PPIs) does not permit loading of PPIs from credit lines - a practice being undertaken by several fintech credit card companies.

These companies typically tie up with banks or NBFCs and offer credit lines into their prepaid wallets.

The move also comes as the central bank was reportedly concerned over the new-age firms seemingly assuming the lender's role without building sufficient safeguards.

The RBI believes that unlike traditional lenders, the fintech firms lack sufficient capital and credit underwriting capabilities, a person familiar with the matter was quoted in the ET report as saying.

These firms, the person cited above added, are in no position to withstand shocks that would reverberate through the financial system, ending up hurting the most vulnerable of borrowers these companies originally intended to serve by providing access to loans.

Additionally, PPIs are transactional vehicles for a customers to spend their own money - not borrowed funds that bring into equation judgemental subjects such as customer credentials and ability to repay, the person said.

As a result, the RBI has now barred the new-age fintech firms from loading credit lines onto the PPIs, the instruments that by nature should not ordinarily involve assessments of creditworthiness.

The decision has reportedly created widespread confusion in the segment of the payments industry.

Fintech firms have likened the order to giving traditional banks significant control of the sector's innovation stack, potentially affecting their business models.

"The RBI seems to be apprehensive of the control being with fintechs and wants to move it fully to banks," said one of the entrepreneurs, whose startup would be among those likely affected by the new regulations, ET reported.

Further, several fintech firms have temporarily disabled all future transactions in view of the RBI's new norms.

Industry groups such as the Digital Lenders' Association of India (DLAI) and the Fintech Association for Consumer Empowerment (FACE) have been seeking relief from RBI and are pushing for a deferment of implementation timelines.

"The issue is with the word 'credit line'. It is fair if a credit line is provided by a PPI player or an unregulated entity. But technically it should not be a problem if both the NBFC partner and the PPI are regulated by the RBI," a payments industry executive was quoted in the ET report.

The Central bank is wary of credit products, such as Buy Now Pay Later (BNPL), for some time. Since January, it started conducting surveys and sought details on business models, client segment and delinquency rates of BNPL players.

RBI is worried delinquency rates as high as 10 per cent on BNPL books could lead to systemic risks, with non-banks involved in facilitating these credit lines.