RBI says banks, NBFCs cannot use credit lines to load prepaid e-wallets

The fintech ecosystem is losing sleep over the Reserve Bank of India’s June 20 notification banning the loading of prepaid payment instruments (PPIs) from credit lines.

The two-paragraph notification reads, “Prepaid payment instruments cannot be loaded via credit lines, and any non-compliance would attract penal action from the regulator.”

The notification is addressed to all non-bank PPI issuers, which led to some sections interpreting it as a ban only on credit lines from NBFCs, but industry sources tell CNBC-TV18 that RBI has made it clear that the ban is applicable to credit lines from both banks and NBFCs.

Typically, fintechs tie up with banks, NBFCs to offer credit to customers. App-based credit card providers like Slice, Uni use wallets to issue credit lines from banks or NBFCs to their customers.

They pay a fee to the bank/NBFC, and earn a 1.5 percent interchange each time the customer makes a transaction using the credit line.

This ban jeopardises several fintech buy now pay later (BNPL) business models that rely on this mechanism for providing payments-based credit.

They might be forced to partner with credit card players for co-branded card issuance or acquire an NBFC as well as credit card licence themselves. For some, this might be an end to credit as a revenue model and they will become just prepaid cards or classic BNPL models.

To begin with, KYC guidelines for wallets are less stricter than those for a credit card.

The purpose of a PPI licence is to act as a payment instrument and not as a credit instrument, which, by offering such credit lines, PPI issuers were acting as. NBFCs and banks had been disbursing loans on the basis of the paying capacity of PPI platforms but with this move, RBI is perhaps trying to bring the end user directly under the lens of regulated financial entities.

Also, there have been complaints about customers unknowingly taking a line of credit via wallets at the point of check-out. To avoid all of this, RBI may have taken this step.

So the move can be seen as a step towards the regulation of the large unregulated fintech space.