Here is why RBI's new norms for BNPL have also created opportunities for players

The Reserve Bank recently banned the loading of prepaid payment instruments with credit lines, alarming India’s rapidly growing Buy Now Pay Later (BNPL) industry. But analysts say though the industry may have to face the impact of regulations for some time, it is likely that these norms would led them to become a better version of themselves by fixing the gaps.

Mehul Mistry, global head of strategy, digital financial services and partnerships, Wibmo, a PayU company, said such firms may be able to apply to RBI to allow them to launch credit cards or they may partner with banks to launch co-branded credit cards.

Banks are the only authorities allowed to issue credit cards in India with strict rules. Many BNPL companies began to circumvent the rules by partnering with banks to issue cards with diluted KYC process and little to no check on credit histories, forcing the RBI to consider stringent measures to stop the spillover effects on the entire system.

The central bank has been monitoring digital lenders after it received more than 650 suggestions/complaints regarding KYC irregularities, disbursement of loans without consent, and sudden drop in credit scores amongst other issues. The RBI’s committee that investigated the issues found out that there were 1,100 illegal digital loan providers across the country.

RBI governor Shaktikanta Das first announced the decision to issue guidelines for BNPL on June 17, when he said, “Big tech's play in finance poses systemic concerns like overleverage.”

For the past few years, fintechs, partnering banks and NBFCs for lending, have been claiming to be serving the poor and underserved. Industry players believe the RBI's move is a threat to many fintechs' rapidly growing business models, which include those of Slice, KreditBee, LazyPay, Uni, etc.

India currently has around 22-25 million BNPL users, according to Benori Knowledge, a global provider of custom research and analytics solutions. As per reports, RBI’s move may affect 8-10 million or about 40 percent of total users.

According to a Moneycontrol report published in June, industry bodies including the Internet and Mobile Association of India (IAMAI) and the Payments Council of India (PCI) had prepared to make representations to the RBI and government arms, questioning their stance on supporting innovation and financial inclusion.

“The notice has caused a lot of confusion not just for fintech firms but also for customers and investors. These fintechs will seek clarity on what RBI exactly wants so they can plan their business models accordingly,” one of the sources was quoted as saying in the report. 

The term BNPL may be still new for a lot of Indians, but the concept has been as old as consumer credit allowing customers the flexibility to split bills.

Regardless of RBI’s restrictions, high-risk borrowers are expected to continue to use BNPL apps for various online transactions, considering seeking credit from a bank is a huge struggle for them.

These apps are also attractive to the middle-class population as they provide exclusive offers with food delivery apps, mobility apps, and e-commerce platforms.

“BNPL has proved to be a boon for the Indian population given the low economical status of the majority of the population,” Amit Nigam, director and COO of banking assistance app BANKIT, told CNBCTV18.com.

Besides, BNPL has massive demand in tier-2 and -3 cities and many consumers in these markets look for small-ticket credit for specific needs but are not eligible for credit cards. In such cases, BNPL apps become the perfect option for them to make online transactions hassle-free.

While Nigam says the industry may have to face the impact of regulations for some time, it is likely to work on a “more beneficial” solution to fix the gaps. “The industry will be strategising its policies and services and make better the ways that went wrong earlier,” he said.

“BNPL industry would wait for some modifications in the regulations from RBI’s end and if nothing for betterment takes place then it would have to come up with something that would not put its services in against of RBI the next time,” Nigam added.

India’s BNPL industry was estimated to surge more than 10-fold in the next four to five years, according to a Reuters report published last year.

"The regulation does not mean dissolution," said Anil Pinapala, CEO and Founder of Vivifi India Finance, who added that the RBI is an institution that supports innovation and it will continue to do so.

“Within the BNPL space, too, we expect that the regulations will be to set up guard rails for lending fintechs and this will pave way for much faster growth outpacing all previous expectations,” he said.