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Non-banks can’t load credit lines into prepaid payment instruments: Reserve Bank of India

In what comes as a blow for well-funded fintech startups, the Reserve Bank of India (RBI) on June 20 issued a clarification on Prepaid Payment Instruments (PPIs) such as wallets and prepaid cards, saying that non-bank institutions cannot load credit lines into these instruments, according to sources.

The notification was addressed to “All Authorised Non-bank Prepaid Payment Instrument (PPI) Issuers.” According to multiple sources, the message was sent to non-bank PPI issuers, including fintech players.

RBI’s official notification on its website is awaited.

RBI’s clarification, Moneycontrol reviewed, said, “The PPI-MD 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 of the Payment and Settlement Systems Act, 2007.”

PPI-MD refers to the Master Direction on these instruments, a document that consolidates instructions on rules and regulations.

The immediate impact of this clarification is unclear; however, fintech like Slice, Uni, PayU’s LazyPay, KreditBee, etc., also extend credit through prepaid co-branded cards. But the critical issuers of these cards are banks like SBM Bank India, and RBL Bank, among others.

Sometimes, while the card issuer is the bank, the credit line is extended by the fintech’s NBFC partners. The extent of the impact on these players is yet to be ascertained.

The move may mean that these products cannot be extended anymore if non-banks develop the credit line.

In response to Moneycontrol, Slice founder and CEO Rajan Bajaj said, “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.”

The clarification also mentioned that the PPI Master Direction only permits for these instruments “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 shall be in INR only.”

Meanwhile, a detailed set of guidelines on digital lending is still awaited, and the RBI is likely to release those soon. RBI has been regulating fintech through various other means, one being the recent update in credit, debit, and co-branded cards.

The Master Direction limited the role of co-branding entities to marketing and distribution of credit or prepaid cards, casting a shadow on the viability of the business models of card distributing fintech.

The changes, set to come into effect on July 1, also said that the co-branding partner should not have access to information relating to transactions undertaken through the cards.

Moneycontrol reported on June 14 that banks, through the apex body Indian Banks’ Association (IBA), have sought a six-month extension beyond the June 30, 2022 deadline from the RBI.

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