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RBI bars prepaid wallets and cards from offering credit lines to customers

Non-banks issuing prepaid payment instruments (PPIs) like wallets and prepaid cards cannot offer customers a credit line, RBI said.

What’s the news? Non-banks issuing prepaid payment instruments (PPIs) like wallets and prepaid cards cannot offer customers a credit line on these instruments, according to a non-public notification issued by the Reserve Bank of India (RBI) on June 20.

Why does this matter? This move could severely affect Indian fintech start-ups like Slice, LazyPay, PhonePe, and Paytm, whose businesses involve issuing short-term loans to customers to refill their prepaid cards or wallets. It could also disrupt the burgeoning “buy now pay later” segment. Typically, these start-ups partner with banks and non-banking financial companies (NBFCs) to offer the cards and credit lines. On the other hand, the move could benefit credit card issuers like HDFC Bank and ICICI Bank as they will once again become the default option for customers seeking short-term credit.

“We are evaluating this regulation and are committed to being on the right side of regulation in letter and spirit. We are working with our partner bank on this.” — Slice founder and CEO Rajan Bajaj told MoneyControl

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What prompted RBI to issue this notification? RBI did not explicitly state why it issued this notification, but a recent surge in the number of fintech and neobanks offering credit lines might have nudged RBI to exercise caution. Notably, the notification does not introduce any new rule. According to RBI, the Master Directions on PPls (PPI-MD), which is the set of guidelines governing the issuance of PPIs, state:

“PPls shall be permitted to be loaded / reloaded by cash, debit to a bank account, credit and debit cards, PPls (as permitted from time to time) and other payment instruments issued by regulated entities in India and shall be in INR only.”

In other words, the PPI-MD does not permit the loading of PPIs from credit lines. RBI’s June 20 notification attempts to merely clarify the same.

Applies to just non-banks or everyone? Since the notification is addressed to non-banks, there’s a question as to whether banks that issue PPIs can continue offering credit lines to customers. But the confusion arises because PPI-MD applies to all entities that issue PPIs, which includes banks. Hopefully, RBI issues clarification on this soon.

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What happens in case of non-compliance? RBI said that any practice in violation of these directions should be stopped immediately and that any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007.

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