RBI Proposes Higher Net Worth, Tighter KYC Norms For Pre-Paid Instruments

RBI wants PPIs to have a minimum net worth of Rs 25 crore.

A person shows the Aadhaar app on his mobile phone (Photo: The Quint)
A person shows the Aadhaar app on his mobile phone (Photo: The Quint)

The Reserve Bank of India (RBI) on Monday proposed to raise the capital requirement for entities offering pre-paid instruments (PPIs), including mobile wallets, as it seeks to strengthen regulation over a payment mechanism that is growing in popularity. The guidelines are currently at a draft stage and the regulator has invited comments from the industry by March 31.

The RBI has proposed that all entities seeking fresh approvals to launch PPIs will need to have an audited net worth of Rs 25 crore, which must be maintained at all times. This regulation will also apply to existing entities who have been given time till September 2020 to increase their capital base, failing which they may not be allowed to operate. The new net worth requirement is significantly higher than the Rs 1 crore currently prescribed for non-bank PPI issuers.

These guidelines also seek to prevent any intermingling of funds which may be obtained by PPI issuing entities from other sources. So for instance, cash deposits in bank accounts for a bank can’t be counted towards the net worth requirement. Similarly, revenue from sales for a company like Paytm, which may have multiple businesses, will also not be seen as part of the net worth.

PPI issuers shall ensure that there is no co-mingling of funds originating from any other activity that the Issuer may be undertaking such as business correspondent of bank/s, intermediary for payment aggregation, payment gateway etc.
RBI Draft Circular on Master Guidelines For PPIs

The RBI also wants any mergers, acquisitions or change in management to go through the regulator.

To curtail money laundering and suspicious activity, the RBI said that all PPI issuers will need to maintain a log of transactions done using the instrument and submit a Suspicious Transaction Report (STR) to the regulator and to the government’s Financial Intelligence Unit (FIU). PPIs with zero balance for a consecutive year shall be closed after a notice is sent to their holders.

Moreover, the guidelines include a list of detailed instructions that seek to make PPIs safer for customers. The RBI wants issuers to put in place mechanisms such as customer induced transaction caps on their wallets, restriction of multiple invalid attempts to sign-in, and a cooling period for funds transfer after opening a PPI to prevent fraudulent use of the account.

PPI Issuers shall clearly outline the amount and process of determining customer liability in case of unauthorized / fraudulent transactions involving PPIs. This framework shall be consistent with the customer liability limit instructions issued by the Reserve Bank of India from time to time.
RBI Draft Circular on Master Guidelines For PPIs

PPIs also need to submit a yearly systems audit report carried out by a team of chartered accountants. This system audit should cover technology, hardware and compliance systems of PPIs.

Tighter KYC Norms

Another key change proposed is a tightening of KYC (know your customer) norms for those transacting through PPIs. A earlier provision where you could hold up to Rs 10,000 in a ‘minimum information’ PPI account has been tweaked. PPI issuers will now have to convert every ‘minimum information’ account into a fully KYC compliant account within 60 days. In the interim, customers can hold up to Rs 20,000 in the account.

An industry representative said this can hurt business.

The RBI is saying that minimum KYC accounts need to be converted into full KYC within 60 days. This is going to have a big impact on the businesses. For the users, it means that you will have to give a lot of documents. Not everyone has full KYC documents, which could reduce a lot of use cases such as labour sending money home. PPIs connected well with the bottom of the pyramid. Are we saying that a person without officially valid documents can’t use digital payments?
Gaurav Chopra, Executive Director, Payments Council of India

While the regulator has tightened some norms, it has suggested a liberalization of rules in other respects. One such aspect is interoperability among mobile wallets. The draft guidelines suggest that PPIs can be loaded from another PPI.

“Fund transfers from such PPIs to bank accounts and also to PPIs of same issuers (and to PPIs issued by other issuers as and when enabled) shall not exceed Rs 10,000/- per month,” said the RBI in the draft guidelines.

This, however, could also be interpreted to mean that the limit of funds transfer between two customers of the same PPI will now get reduced from Rs 20,000 to Rs 10,000, explained Chopra from PCI.

Further, the central bank has proposed that fully KYC compliant semi-closed PPIs may be allowed to be used in cross-border transactions. Semi-closed wallets are those which can be used to settle third party transactions such as Paytm or FreeCharge. The bank said that this facility shall be enabled only on “explicit request” of the customer and a transaction limit of Rs 5,000 shall apply to begin with.

In light of the fresh proposals, all authorisation for PPIs will remain suspended till April 30, 2017.

“On one hand there is opportunity provided to grow the scope and activities of PPIs, that is, considering receiving of foreign remittances in PPIs, allowing transfer of money between different PPI issuers by customers and possible access to inter-operable systems and on the other hand overall strengthening of various process and steps like entry criterion in terms of capital as well as net worth to protect customers and mitigating other risks. However the fine print in terms of limits etc would need some discussion,” said Naveen Surya, managing director of digital payments company ItzCash, and chairman of PCI.