The RBI Report of the Committee for Review of Customer Service Standards in RBI Regulated Entities recommended that “The Reserve Bank may examine whether Deposit Insurance and Credit Guarantee Corporation (DICGC) cover can be extended to bank PPIs and later to non-bank PPIs based on experience gained.” (Paragraph The committee opined that the money in PPIs (prepaid payment instruments) such as wallets was in the nature of “deposits.”

The RBI’s Master Directions on PPIs (updated as on February 10, 2023) defines PPIs as “instruments that facilitate purchase of goods and services, financial services, remittance facilities, etc., against the value stored therein.”

PPIs in the current forms were introduced by the RBI in 2010. Even in the ‘paper’ regime of the payments system, PPIs existed in the form of demand draft, travellers’ cheque, gift cheque/card, etc.

As per the Master Directions, PPIs are of three types: (a) Small (or minimum-detail PPIs) used only for purchase of goods and not for funds transfer or cash withdrawal; (b) Full-KYC which can be used for funds transfer and withdrawal as well; and (c) Specific categories, which include gift PPIs, mass transit systems, etc. PPIs are issued as cards, wallets and in any such form/instrument which can be used to access the PPI and to use the amount therein. No PPI is issued in the form of paper vouchers. The Master Directions ensures protection of PPI customers in several ways.

Chart 1 illustrates the progress of PPIs for the period 2011-12 to 2022-23 (March-end). During 2011-12 to 2022-23, while the volume of PPI transactions increased from 31 million to 7,467 million (CAGR: 64.8 per cent), the value increased from ₹62 billion to ₹2,871 billion (CAGR: 41.7 per cent). Except for a dip in 2020-21, the uptrends were continuous.

However, the average transaction size (ATS) fell precipitously from ₹2,026 in 2011-12 to ₹385 in 2022-23, yielding a negative CAGR of 14 per cent (Chart 2). These imply that PPIs were used frequently, but for small spends.

The ratio of PPI payments to total retail payments fell from 10.8 per cent in 2015-16 to 6.5 per cent in 2022-23 after peaking at 22.1 per cent in 2017-18 (volume-wise) and hovered around 0.3 per cent to 0.6 per cent (value-wise). Within PPIs, both volume- and value-wise, m-wallets seemed more popular than PPI cards.

Three approaches

What happens to the PPI-holder’s balances if the issuer becomes insolvent? Worldwide, PPIs are not generally treated as deposits; they are ‘deposit-like’ stored-value products. Another important aspect is that PPIs generate ‘float’. Normally, when a transaction occurs in a Savings or Current account, the transaction and the total balance are immediately shown. However, for electronic payments which are not settled in real time, the payments from the payer’s account are not immediately shown in the payee’s account, and this is called ‘float”. In the PPI context, ‘float’ is typically called the total value of outstanding customer funds.

That they are deposit-like stored-value products and that they generate ‘float’, combined with jurisdictional differences in implementation of deposit insurance (DI), make the provision of DI difficult for PPIs. In this context, the Consultative Group to Assist the Poor (CGAP), a global partnership of over 30 leading development organisations that works to advance the lives of people living in poverty, especially women, through financial inclusion, discusses three general approaches.

The first, known as the exclusion approach, explicitly excludes such products from DI coverage, although it retains other protections to customer’s stored value.

The second, known as the direct approach, directly insures such products provided their issuers are members of the Deposit Insurance System (DIS).

And the third is pass-through, which is “the most complex and the least explored approach to date.” Under this approach, DI coverage is provided to PPIs even when the issuer is not a DIS member. As per this approach, the PPI issuers collect the ‘float’ from customers by issuing PPIs and keep it in one or more “pooled custodial” accounts with a bank (or other member-institution of DIS). As the custodial accounts are meant to benefit the ultimate customers rather than the PPI issuer, no DI coverage is extended directly to such issuer (not a DIS member).

Instead, coverage is provided indirectly or “passed through” by the custodial account provider (a DIS member) to each individual PPI account-holder, as they are legally the owners of the funds constituting the ‘float’ in the custodial account.

Outstanding balance

Although the Master Directions doesn’t deal with the issue of protecting PPI holders in the event of insolvency of the PPI issuer concerned, it requires the non-bank PPI issuer to maintain the outstanding balance in an escrow account with any scheduled commercial bank.

For bank-operated PPI schemes, the outstanding balance is part of the ‘net demand and time liabilities’ for the purpose of maintenance of reserve requirements.

However, if DI is extended to PPIs issued by non-banking financial companies (NBFCs), the deposit-taking NBFCs (NBFCs-D) may revive their long-pending demand for DI for all their customers’ deposits. Various committees had examined this issue and recommended against extending DI to NBFCs.

As of September-end 2022, there were 49 NBFCs-D which held public deposits amounting to ₹716.4 billion constituting 7.8 per cent of their total liabilities. Today, after the implementation of Scale Based Regulation, the NBFCs-D are in a better position and hence DI may be considered for their public deposits.

Thus, the RBI/DICGC may constitute a committee to study critically the aforementioned approaches along with other approaches, if any, for implementation.

Das is a former senior economist with SBI