IMPACT OF RBI’S PPI CIRCULAR ON FINTECH COMPANIES
Introduction and Background
The Reserve Bank of India (“RBI”), pursuant to the Master Directions on Prepaid Payment Instruments dated August 27, 2021 and updated in November 2021, (“2021 Master Directions” or “PPI MD”) described the issuance of Prepaid Payment Instruments under the Payment and Settlement Act, 2007 (“PSS Act”).
Following this development, fintech companies started using credit lines to load/top-up these PPIs especially in the Buy Now, Pay Later (“BNPL”) segment. However, RBI on 20th June, 2022 clarified its displeasure with this arrangement in a circular (“PPI Circular”) prohibiting the use of credit lines to load/top up PPIs.
This article (A) explains what PPI instruments are and (B) gives an overview of the types of PPIs and (C) PPI issuers in India. The Memo further analyses (D) the PPI circular and (E) its impact on fintech companies.
A. What are Prepaid Payment Instruments?
Prepaid payment instruments (“PPIs”) are payment instruments that facilitate purchase of goods and services against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holder, by cash, by debit to a bank account, or by credit card. PPIs can be issued as smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers and any such instruments which can be used to access the prepaid amount.[i]
B. What are the types of PPIs recognized by RBI?
|Issuance||Small PPIs are of two types (i) PPIs up to Rs.10,000 (with cash loading facility) (ii) PPIs up to Rs.10,000 (with no cash loading facility). Banks and non-banks can issue such PPIs after obtaining minimum details of the PPI holder.[iv] Their features must be clearly communicated to the PPI holder at the time of issuance of the PPI or before the first loading of funds.||These PPIs (“KYC-PPI”) are issued by banks and non-banks after completing Know Your Customer (“KYC”) of the PPI holder. Paragraph 6 of 2021 Master Direction also lays down provisions safeguards against money laundering that must be met.|
|Use||Small PPIs can be used at a group of clearly identified merchant locations or establishments which have a specific contract with the issuer (or contract through a payment aggregator or payment gateway) to accept the PPIs as payment instruments.[v] They can be used only for purchase of goods and services. Cash withdrawal or funds transfer from such PPIs is not permitted.[vi]||KYC-PPIs can be used for purchase of goods and services, funds transfer or cash withdrawal.|
|Fund Transfer||Not Permitted.||Funds transfer from KYC-PPIs is permitted to other PPIs, debit cards and credit cards as per the prescribed limits.|
|Cash Withdrawal||Not permitted||In case of bank issued PPIs, cash withdrawal is permitted but withdrawal at PoS devices is limited to Rs.2,000 per transaction within an overall monthly limit of Rs.10,000 across all locations. For non-bank issued PPIs, cash withdrawal is permitted with the same limits across all channels.|
|Reloadability||They are reloadable in nature. The amount loaded in Small PPIs can’t exceed Rs.10,000 in any month, and Rs.1,20,000 in a financial year. The amount outstanding at any point of time in can’t exceed Rs.10,000. Total amount debited during any month can’t exceed Rs.10,000. For PPIs up to Rs.10,000 (with no cash loading facility), loading and reloading need to be from a bank account, credit card or full-KYC PPI.||KYC-PPIs are reloadable in nature however the amount outstanding cannot exceed Rs.2,00,000 at any point of time. PPI issuer can, however, set the limits considering the risk profile of the PPI holders, other operational risks, etc.|
|Conversion||PPIs up to Rs.10,000 (with cash loading facility) will be converted into full-KYC PPIs within a period of 24 months from the date of issue of the PPI, failing which no further credit will be allowed in such PPIs. However, the PPI holder will be allowed to use the balance available in the PPI.||N/A|
|Reissuance||PPIs up to Rs.10,000 (with cash loading facility) can’t be issued to the same user in the future using the same mobile number and same minimum details.||N/A|
|Closure||PPI issuer must give an option to close the PPI at any time. The closure proceeds can be transferred ‘back to source account’.[vii]||PPI issuer must give an option to close the PPI and transfer the balance as per the applicable limits. The funds can be transferred ‘back to source account’ or ‘own bank account of the PPI holder’.[viii]|
|Pre-registered beneficiaries||N/A||PPI issuer must provide a facility whereby the PPI holder can register the beneficiaries by providing their bank account details,
details of PPIs issued by same issuer, etc.[ix]
C. Types of PPI Issuers in India
PPIs can be issued by banks and non-banks or under a co-branding strategy.
- Banks: Banks can issue PPIs after obtaining approval from RBI and satisfying paragraph 3 of the 2021 Master Directions. The list of Bank PPI issuers approved by the RBI are listed here. Examples of bank PPIs include HDFC Flexipay, ICICI Paylater, HDFC Payzapp, SBI YONO, and ICICI Pockets.[i]
- Non-Banks: Non-bank PPI issuers can be companies incorporated in India and registered under the Companies Act, 1956 or the Companies Act 2013. Non-bank PPI issuers can operate a payment system for issuing PPIs to individuals or organisations after receiving authorization from RBI and satisfying paragraphs 4 and 5 of the 2021 Master Directions. The list of Non-Banks authorised by the RBI to be PPI issuers is provided here. Examples of non-bank PPIs are Paytm, PhonePe, Google Pay, MobiKwik, Oxigen, Ola Money, and Amazon Pay.[ii]
- Co-Branded PPIs: PPIs can be issued on co-branded basis by the PPI issuer with another entity (the co-branding Partner). The co-branding partner can be (i) a bank, (ii) a company incorporated in India under the Companies Act, 1956 or the Companies Act 2013, or (iii) a Government department or ministry. If the co-branding partner is a bank, such bank must be licensed by RBI. In case of a co-branding arrangement between a bank and a non-bank entity, the bank will be the PPI Issuer. In case both the entities are non-banks, one of them will be pre-assigned, in advance, the role of issuer among themselves. Between the two partners, the entity designated as the PPI issuer must be responsible for addressing all customer service aspects relating to the co-branded PPI.[iii] Slice and Fi offer credit via pre-paid co-branded cards issued in partnership with banks.[iv]
The PPI circular was issued in the form of a letter to all authorised non-bank PPI issuers, rather than as a notification on the RBI’s website. It specifically refers to paragraph 7.5 of the 2021 Master Directions and states that the Master Directions do not permit the loading of PPIs from credit lines. It specifically requires the immediate stoppage of such practices and threatens penal action under the PSS Act in cases of non-compliance. The rationale by the RBI is that PPIs should not be used as credit instruments and this clarification was necessary to address the concerns about the growing emergence fintech companies that have been aggressively extending unsecured lines of credit through these PPIs, increasing the risk in the system. RBI wishes to eliminate digital lending risks like that of the fake loan apps and the unsolicited loans.[xiv]
The reading of paragraph 7.5 with the PPI Circular has raised some ambiguities with respect to who it applies to. Paragraph 7.5 states ‘PPIs will be permitted to be loaded / reloaded by cash, debit to a bank account, credit and debit cards, PPIs (as permitted from time to time) and other payment instruments issued by regulated entities in India and will be in INR only.” While the PPI circular is addressed to “all authorized Non-Bank PPI Issuers,” paragraph 7.5 is applicable to all PPI issuers including bank PPI Issuers. Thus, a clarification on the applicability of this Circular is required.
As it stands at the moment, non-banks can no longer load PPIs, including digital wallets, stored-value cards etc. using credit lines. They may only be loaded with cash, bank accounts, and debit or credit-cards. This could further mean that co-branding partners may not get full access to customer transaction data.[xv]
E. Impact on Fintech Companies
The loading of PPIs with credit lines has become prevalent with the use of credit lines for loading wallets, disbursing loans through wallets, applying Buy Now Pay Later (“BNPL”) schemes, and app based credit cards that use wallets to issue credit lines from banks or NBFCs to their customers.[xvi]
Companies such as Lazy Pay, Amazon Pay Later, Paytm Postpaid offer BNPL products where a customer can make a purchase without having to pay the purchase amount which is instead paid by the BNPL company (“BNPL Amount”) and later repaid by the customer to the BNPL company. Many of these companies source their credit from non-bank partners to offer BNPL products, and accordingly will be deeply impacted by the PPI Circular that prohibits this practice. [xvii]
Similarly, companies like MobiKwik, One Card, and Jupiter allow instant loans and the loading of the user’s wallets through credit lines. For companies like MobiKwik that have partnered with both banks and non-banking financial corporations (“NBFCs”),[xviii] it will depend on which partner is providing the credit line to a User/Customer. If the NBFCs are providing the credit line to load the PPI (here the online wallet) it is prohibited by the PPI Circular. However, if the banks are providing the credit line to load the PPI, then the same may be permissible depending on a clarification by the RBI that the PPI circular doesn’t apply to Bank PPI issuers. Companies like Lazy Pay that are owned by NBFCs (PayU Finance) and partner with banks are in a similar situation.[xix] Companies like OneCard, that have only partnered with banks and have no NBFC affiliation,[xx] may be safe from the PPI Circular.
F. The Way Ahead
As a way forward, unless the RBI clarifies the applicability of the PPI circular, non-bank PPI Issuers may have to offer credit lines routed through an RBI authorised bank to be in compliance with the PPI circular. After the PPI Circular was sent out, Fintech bodies started consultation with the RBI seeking clarity and also decided to approach the government over the RBI’s recent circular. On June 25th, the Payment Council of India, a trade body consisting of various payment and settlement players from the country, asked the government to let KYC-PPIs to be loaded with credit lines.[xxi] Companies like LazyPay have already updated its terms and conditions,[xxii] to comply with the RBI circular. Similarly, fintech firms such as Jupiter, EarlySalary and KreditBee have temporarily stopped customers from making any transactions on their prepaid cards.[xxiii] Even partner banks involved in the co-branding relationship are said to be under pressure due to the PPI Circular and some are said to be ceasing their co-branding partnerships effective June 30th.[xxiv]
This article has been authored by Manya Oberoi, Associate, Inventus Law, India with assistance from Saloni Palkhiwala, Intern, Inventus Law. If you have any questions about this article, please contact Vivek Balakrishnan, Principal Associate, Inventus Law, India at firstname.lastname@example.org, or Manya Oberoi, Associate, Inventus Law, India at email@example.com.
Disclaimer: This Memo is being provided for information purposes only and is drafted entirely on the basis of public resources. Information contained on or made available herein is not intended to and does not constitute legal advice, recommendations, mediation, or counseling under any circumstance. This information and your use thereof do not create an attorney-client relationship. You should not act or rely on any information provided herein without seeking the advice of a competent advocate licensed to practice in your jurisdiction for your particular business.
[i] ¶ 2.3, Draft Guidelines For Issuance and Operation of Prepaid Payment Instruments In India (“PPI Guidelines”) available at https://rbi.org.in/Scripts/bs_viewcontent.aspx?Id=1902.
[ii] Earlier PPIs were classified into (a) Closed system PIs (issued by business establishments for use at their respective establishment only and do not permit cash withdrawal or redemption); (b) Semi-Closed system PIs (redeemable at a group of identified merchant locations which contract specifically with the issuer to accept the payment instrument- do not permit cash withdrawal or redemption); (c) Semi-Open system PIs (used for purchase of goods and services at any card accepting merchant locations- do not permit cash withdrawal or redemption by the holder), (d) Open system PIs (used for purchase of goods and services and also permit cash withdrawal at ATMs.) Operation of Closed system PIs is not classified as a payment system requiring approval/authorization by RBI and are, therefore, not regulated or supervised by RBI. See, PPI Guidelines ¶¶ 2.4-2.7.
[iii] The 2021 Master Directions also speak of (a) Gift PPIs where the maximum value of each such prepaid gift instrument is Rs.10,000 and these PPIs are not reloadable. and (b) PPIs for Mass Transit Systems (MTS) issued by MTS operators after authorization to issue such PPIs under the PSS Act, 2007. See, ¶¶ 10.1 and 10.2, PPI MD.
[iv] Minimum details necessarily include mobile number verified with One Time Password, a self-declaration of name and unique identification number of any Officially Valid Document (“OVD”). OVDs can include any such document listed for this purpose in the RBI Master Direction on KYC, as amended from time to time and available at https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11566.
[v] ¶ 2.8, PPI MD.
[vi] While there is no separate limit for purchase of goods and services using PPIs, the PPI issuers may decide limit for these purposes within the overall PPI limit.
[vii] This is the payment source from where the PPI was loaded.
[viii] PPI issuer is responsible for verifying that the bank account pertains to the PPI holder for which it may devise suitable methods of verification.
[ix] For such pre-registered beneficiaries as well the funds transfer limit can’t exceed Rs.2,00,000/- per month per beneficiary.
[xii] See, RBI FAQs 32-34 available at https://www.rbi.org.in/Scripts/FAQView.aspx?Id=126#:~:text=The%20non%2Dbank%20PPI%20issuers,4.
[xvii] For instance, Slice has partnered with NBFCs such as Quadrillion Finance Private Limited, DMI Finance Private Limited, Northern Arc Capital Limited, and Vivriti Capital Private Limited, and Paytm Postpaid has partnered with the NBFC Clix capital. See, https://www.financialexpress.com/industry/banking-finance/industry-seeks-clarity-on-rbi-norm-barring-loading-of-wallets-with-credit-lines/2568226/; https://entrackr.com/2019/06/paytm-postpaid-transfer-loan-book-to-clix-capital/
[xxii] See, https://lazypay.in/tnc, https://economictimes.indiatimes.com/tech/startups/lazypay-updates-terms-to-comply-with-rbi-order/articleshow/92578465.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst;
[xxiii] See, https://economictimes.indiatimes.com/tech/technology/card-based-fintech-in-dire-straits-with-ppi-lending-ban/articleshow/92395045.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst