RBI Warns Against Using Credit Lines To Top Up Prepaid Instruments: Who Gets Hurt?

The Reserve Bank of India has asked non-bank prepaid instrument issuers to stop loading wallets and other prepaid instruments through credit lines. In a communication to prepaid instrument issuers dated June 20, the banking regulator has said that its master directions do not allow this.

"The PPI-MD does not allow loading of PPIs from credit lines. Such practices if followed, should be stopped immediately," the regulator said in its communication, and emphasised that it will take action in case of non-compliance.

BQ Prime has reviewed a copy of the communication.

The master directions state that PPI issuers may allow loading or reloading of prepaid instruments by "cash, debit to a bank account, credit and debit cards, prepaid instruments (as permitted from time to time) and other prepaid instruments issued by regulated entities..."

According to a person with direct knowledge of the matter, this will affect prepaid instrument issuers who have built a lending ecosystem around their wallets. Under such arrangements, the issuers load a customer's wallet through a temporary credit line to users. This credit line is offered by a partnering non-banking finance company or bank. The customers can then use the funds in their wallet and repay the loan over time. Those issuing prepaid cards, branded as credit cards, will also likely be impacted.

The prepaid instrument industry is still seeking some clarity from the regulator on finer issues, the person quoted above said.

According to data available with the RBI, there are 37 non-bank PPI issuers in the market. These include Amazon Pay, Bajaj Finance, Ebix Payment Services, Manappuram Finance, Ola Financial Services, and One Mobikwik, among other issuers.

Who Is Impacted?

The RBI's letter is addressed to non-bank PPI issuers.

According to Nomura, if the RBI is creating a distinction between which regulated entity has issued the PPI, for example a bank versus non-bank issued instrument, "then we do not see any restrictions being imposed on fairly successful challenger business models, such as Uni 1/3 card, SliceIt or PostPe card, as all three of these Fintech players piggyback on bank-issued PPIs." Likewise, there is commingling of money between PayTM postpaid and PayTM wallet (issues by PayTM Payment Bank), said Nomura.

"If, however, the RBI has sent or intends a similar letter to even bank issuers, then even these business models could face restrictions and result in business model changes," Nomura said.

Some of the new generation players were adding close to 2-3 lakh cards using PPI licenses and loading the wallets of consumers using credit lines from NBFCs, banks, said Macquarie in its note. "The main purpose of a PPI license is to act as a payment instrument and not as a credit instrument, and we believe many fintechs were using this as a channel to load credit," it said.

As per Macquarie's interpretation, the decision could impact players like Slice, Unicards, who have been adding a lot of customers through this route. The positive impact is naturally on banks with a large credit card base, said Macquarie.