Image showing a laptop and a user holding a card
Source: India Blooms

RBI says non-banks cannot load credit lines into prepaid payment instruments
This might affect credit products of fintech players who extend credit through prepaid payment instruments

Illustration of online payment instruments
RBI tells fintechs that non-banks cannot load credit lines into prepaid payment instruments.
Source: The Economic Times

On Monday, June 20, the Reserve Bank of India issued a statement clarifying that non-banking institution would not be able to load credit lines into Prepaid Payment Instruments (PPI) like prepaid cards and wallets. Clearly, this comes as blow to fintech startups that are well-funded such as Fi, PayU’s LazyPay, Uni, Slice Jupiter.

Sources stated that the notifications was aimed at non-bank PPI issuers, and addressed as ‘All Authorised Non-bank Prepaid Payment Instrument Issuers.’ However, its official statement is still pending on the RBI website.

“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 contained in the Payment and Settlement Systems Act, 2007.”

Though the immediate effect of this issue is not clear, fintech entities such as Jupiter enable customers to load their credit line in a digital wallet, Along with it, allow them to spend it by connecting in to their UPI (Unified Payment Interface). Jupiter gives its customers these facilities in partnership with LivQuik, its PPI issuer.

Similarly, PayU’s LazyPay is working on such a product but the step means products cannot be extended any further if the bank does not own the prepaid instrument. Fi, Slice, Jupiter, LazyPay also extend credit by means of such cards. However, the main issuers of these cards are banks such as RBL and SBM banks.

On the other hand, if bank itself is the card issuer in certain cases, but the credit line is extended by NBFC partners of the fintechs, the gravity of the impact in such cases is not clear either.

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.”

Moreover, a detailed set of guidelines on digital lending is still pending, which the RBI would possibly release soon. It has been visibly regulating fintechs by several other means, with the most recent one being the update in debit, credit and co-branded cards.

The Master Direction visibly set a limitation to the role of co-branding bodies to marketing and distribution of pre-paid cards. Clearly, this posed a serious challenge to the business models of card distributing fintechs being viable. Additionally, the changes stated that co-branding partner should not hold access to data related to transactions done through those cards.