A Reserve Bank of India (RBI) missive to non-bank players last week, pointing out that its Master Directions do not permit the loading of Pre-paid Instruments (PPIs) with credit lines, has put the Indian fintech industry in a tizzy. RBI has said that PPIs such as mobile wallets, cards or apps can only be refilled with cash deposits, debit to a bank account, credit and debit cards or payment instruments issued by regulated entities and not others. It has also warned that PPIs who are in violation must stop this practise immediately or be subject to penal action. While the clarification on the face of it may appear innocuous, fintech players are apprehensive that it signals RBI’s regulatory intent to clamp down on a host of innovative lending models that have proved a hit with consumers. There are fears that this missive will immediately invalidate business models used by the large ‘challenger’ credit card players who use credit lines loaded by non-bank partners, to offer revolving credit facilities. Wallet and app providers who offer Buy Now Pay Later (BNPL) facilities for small-ticket transactions are unclear if this diktat applies to them.
Given that RBI has not shared this directive publicly, one only can only guess at the regulatory intent behind it which may be two-fold. One, given the systemic risks posed by unsecured retail lending, RBI may be keen not to allow too many non-bank players to enter the revolving credit business. The regulator has so far been quite conservative in authorising entities to issue credit cards; it recently clarified that NBFCs cannot issue credit cards without its express approval. Instruments such as challenger cards, which use tripartite agreements between a fintech player, bank and NBFC to offer revolving retail credit, essentially allow non-banks to bypass these rules. Burgeoning volumes of unsecured retail credit outside of Indian banks’ books could turn a headache for RBI as this could pose systemic risks. Two, RBI could also be worried about opaque practices of wallet-based lenders offering unsolicited loans which put the borrower’s credit score at risk. Many instances have surfaced of online shoppers being lured with freebies, into loans for small-ticket transactions with neither explicit consent nor disclosures on processing fees, credit period and interest. Given that most fintech lenders swear by ‘instant processing’ of loans and rush through the KYC process which requires sharing of sensitive Aadhaar and PAN details, there’s high risk of ID theft and misuse too. To plug this, RBI must insist on fintech players putting in place water-tight security measures and making upfront disclosures on the terms of each loan.
Fintech players need to take this episode as a wake-up call on not predicating their entire business model on regulatory loopholes or grey areas, in the hope that RBI will look the other way. RBI on its part needs to recognise that new-age fintech players, warts and all, do offer innovative products that offer enormous ease of transaction to the consumer. They make credit and savings products accessible to the vast population of retail folk unserved by mainstream banks. It must thus strive not to throw the baby out with the bathwater, while cracking down on doubtful practices in the sector.