India’s Fintech Dream Was Broken by One RBI Notification
The Fintech sector as a whole has been thrown into a frenzy following the RBI’s announcement for non-bank PPI issuers, raising concerns about the business models of several businesses.
The fintech companies are at a crossroads and are looking for clarification to determine if the new regulations cover them. They have also asked for an extension for the most recent instructions given by the central bank.
The regulator should provide new-age financial services firms with enough flexibility to offer value-adding goods and services to end users, according to those who have voiced concerns and made suggestions.
The Reserve Bank of India (RBI) said in a notification dated June 20, 2022, that “PPI-MD does not authorize loading of PPI from the credit line.”
The notification was sent to all authorized non-bank issuers of prepaid instruments (PPIs), and it took effect right away. According to a debate at a meeting conducted on Thursday, June 23, organized by the Digital Lenders Association of India (DLAI), the fintech companies are now asking RBI for an extension and additional clarification.
According to a source in the industry who was aware of the DLAI meeting, the RBI’s major concern is the prospect of individuals sliding into a credit trap and providing credit to a “less worthy population” in accordance with the regulator’s current credit rules.
“All digital lenders are looking for funding from businesses that the RBI has authorized, and the RBI has a transparent trail to track the transactions. However, it has become challenging to maintain everything within RBI’s control since the inclusion of prepaid instruments as a credible alternative is why the decision was made,” the industry source noted.
“DLAI and all its members are dedicated to being in full compliance with both the text and the spirit of all legislation,” the organization stated in a formal statement that it shared. We expect to be able to collaborate with the RBI to put any necessary adjustments into place in a way that respects the interests of all current clients.
To make sure that its members achieve the objectives of financial inclusion and effective credit intermediation while strictly adhering to all regulations, it was added that the association would keep up proactive monitoring of the innovations in digital lending through its network of members and engage in regulatory interactions with all authorities.
When the news was recently reported, several companies contacted us to say that they are not “non-bank” PPIs and are not subject to these rules. Many people also stated that they wanted the RBI to be more specific about this instruction.
However, a PPI is a prepaid instrument since it may be loaded or reloaded with cash, a bank account debit, credit or debit cards, or both before making a purchase or using a remittance facility.
Any type of prepaid instrument, whether it be a smart card, magnetic stripe card, internet account, internet wallet, mobile account, mobile wallet, paper voucher, or anything else if a non-bank PPI issue it, is not permitted to be used in any way to obtain a credit line that the PPI holder is using for future purchases. If a bank PPI can do it or not has not been made clear by RBI.
However, with so much ambiguity present, the entire bank PPI and non-bank PPI ecosystem now need to be reviewed in light of the new guidelines to pinpoint any issues and provide more clarity, according to one of the industry sources who has more than 17 years of experience in the Indian and international banking industries and is currently employed by.
Is RBI stifling the growth of the fintech industry?
The Indian fintech industry is anticipated to develop at a CAGR of 31% to $1.3 Tn by 2025. India now boasts 21 fintech unicorns and more than 4.2K active fintech businesses, riding the tide of new-age technological integrations and support from local and international investor ecosystems. The RBI, however, has mostly remained risk-averse by solely believing in traditional banks and viewing the fintech industry as a supportive environment.
With frequent changes and new regulations the rules, the RBI has been forcing the fintech sector to a crossroads, whether it’s PPI, payments banks, digital loans, credit cards, or crypto.
For instance, the PPIs saw a decline in demand for wallet services following implementing the Unified Payments Interface (UPI) and installing severe requirements to guarantee KYC compliance in 2017. Twenty-two suppliers of digital wallets went out of business during the following three years when their licenses became infructuous.
Concerns have been expressed, and the entry of foreign businesses has been hampered by intense regulatory scrutiny in digital lending, prepaid payment methods, and buy now pay later (BNPL). Earlier, foreign businesses had to leave the Indian market, including BNPL provider Sezzle. Another setback for the sector was implementing a 30% tax on cryptocurrency profits and a 1% TDS on transactions involving cryptocurrency assets.
Many have voiced concerns and proposed that the regulator should provide new-age financial services firms with the flexibility to offer value-adding goods and services to consumers.
For instance, the RBI must specify who the circular relates to, the mitigating measures, and allow enough time for fintech firms to guarantee adherence in the recent non-bank PPI vs. RBI controversy. It is crucial for all parties to spot potential issues early and work together to implement effective solutions as the fabric of the financial startup ecosystem in India develops.
According to CEO and creator of cross-border neo-bank moneyHOP, Mayank Goyal, “Such rash judgments might have a detrimental effect on investor emotions and the inventive spirit of the fintech businesses.”
Expanding on the PPI Ecosystem
Reverting to the original issue with the latest RBI announcement, there is a lot of misunderstanding around bank PPIs vs. non-bank PPIs and how the various businesses, including banks, NBFCs, and fintech companies, are connected. Let’s acknowledge that.
There are now 36 RBI-approved non-bank PPI issuers in India and 57 bank PPIs. Companies registered under the Companies Act of 1956 or 2013 are essentially what non-bank PPIs are. Non-bank PPIs cannot debit the user’s bank account when the PPI is loaded. Bank-issued PPI, however, loads PPI by debiting and crediting bank accounts.
The Payment and Settlement Systems (PSS) Act requires that all non-bank firms seeking authorization from the RBI have a minimum positive net worth of INR 5 Cr. The firm must establish a minimum positive net worth of INR 15 Cr by the end of the third financial year following the date it received final permission. This net worth must be maintained at all times.
Let’s look at a few definitions to clearly understand the problem.
Loan Line: An individual or a business can obtain credit at any time, as needed, through a “line of credit” or “credit line,” a predetermined borrowing limit issued by a bank or an NBFC.
When necessary, one may withdraw the full amount from the credit line. However, the interest is only charged on the borrowed sum.
A “credit line” is simply a virtual credit that isn’t instantly deposited into someone’s account. As a result, it serves as an on-demand credit service that makes money available as and when it’s needed. One can, for instance, apply for a credit card from HDFC Bank with a monthly limit of up to INR 5 Lakh. The customer will be charged the same amount if they make transactions totaling INR 2 Lakh monthly. He/she is not receiving prepaid cards or money in his/her bank account.
Loan: The whole sum is sent to the bank account in the event of credit, such as a personal loan. These include, among others, personal loans, mortgages, and student loans.
Prepaid Card: A prepaid card is a stored-value card with money on it rather than an external account kept by a financial institution. In other words, you are using the funds you already loaded into the prepaid card.
edited and proofread by nikita sharma
