Fintechs seek sunset clause on RBI directive on credit lines by PPI issuers

With the Reserve Bank of India (RBI) cracking down on credit facilities provided by non-bank prepaid payment instrument (PPI) issuers, industry players are seeking a reprieve through a sunset clause of at least a year, industry sources said on Friday.

Earlier this week, the RBI directed the non-bank PPI issuers to stop providing credit lines on such PPI cards and asked them to stop the practice immediately.

"A bunch of fintech players have come out with these PPI cards, and it really boomed during the last two years, especially post-COVID-19. So, a number of people were brought to the new-to-credit and the Buy Now Pay Later (BNPL) proposition of business, the regulator had red flags, saying it is uncontrolled," a source said.

"The lending business has some norms for underwriting a credit, however, here it was like one can get the prepaid credit card just in time. So, the regulator came down heavily to stop this practice," the source said.

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Industry associations like the Digital Lenders Association of India (DLAI), Fintech Association for Consumer Empowerment (FACE), and others, fear that their customer base would be affected by the RBI directive.

"So they want to have some sort of grandfather or sunset clause. They are of the view that they should at least be given a year to allow the transition, or that they can evolve into the credit business. They want the Finance Ministry and the RBI to allow them a little bit of a sunset clause," another source said.

Sunset clauses are specific provisions in laws and they expire after a set timeline.

According to RBI directions on PPIs issued by non-banks, such instruments are allowed to be loaded or reloaded by cash, debit to a bank account, or credit and debit cards. and shall be in Indian rupees only.

"The PPI-MD (Master Directions) does not permit loading of PPIs from credit lines. Such practice, if followed, should be stopped immediately. Any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007," RBI has directed the non-bank PPI issuers.

The fintech players engaged in the PPI-based business model raised funds to expand their business in the recent past, however, it is more like an extension of credit. The regulator is of the view that if you are not treating such credit lines as a personal loan and if there is a loss on it, then there is a case of First Loss Default Guarantee (FLDG).

FLDG is an arrangement whereby a third party compensates lenders if a borrower defaults.

"The regulator is saying that there is no control as there is no regulation over it. Whereas if an NBFC or a bank does it, the RBI will have control over it. So, the issue is about how to bring about transparency and how to bring it under the ambit of the regulator," the sources said.

Raman Kumar, Founder-Chairman of AI-based credit-enabled fintech platform CASHe, said his company doesn't offer PPI cards to its customers, adding that the company stayed away from this product as the regulations were not clear.

"RBI has already announced that they will allow a select group of NBFCs to issue credit cards just like banks. We are awaiting the detailed rules to be announced before we file our application with the RBI, Kumar said.

CASHe offers consumer loan products such as quick personal loans as well as partnership-based BNPL (buy now pay later) credit lines to salaried millennials.

Since its launch in 2017, the fintech platform has registered over 20 million (two crore) app downloads and has disbursed loans of over Rs 4,000 crore to more than four lakh borrowers.