Fintech firms want a sunset clause to stop PPI credit

Industry players are hoping for a reprieve through a sunset clause of at least a year, as the RBI is cracking down on credit facilities provided by non-bank prepaid payment instrument issuers.

The RBI ordered the non-bank prepaid payment instrument PPI issuers to stop providing credit lines on such PPI cards and asked them to stop the practice immediately.

A lot of fintech players have come out with these PPI cards, and it really boomed during the last two years, especially post-Covid. A number of people were brought to the new-to-credit and the Buy Now Pay Later BNPL proposition of business, but the regulators had red flags, saying it is uncontrolled, a source said.

Here it was like you could get a prepaid credit card in time, because the lending business has some norms for underwriting a credit. The regulator came down heavily to stop this practice, the source said.

Industry associations like the Digital Lenders Association of India DLAI Fintech Association for Consumer Empowerment FACE and others fear that their customer base will be affected by the RBI directive.

They want to have a grandfather or sunset clause. They think that they should have at least a year to allow the transition, or that they can evolve into the credit business. Another source said that they want the RBI and the Finance Ministry to allow them a little bit of a sunset clause.

Sunset clauses are specific provisions in laws and they expire after a set timeline.

According to RBI instructions on PPIs issued by non-banks, such instruments are allowed to be loaded or reloaded by cash, debit to a bank account, credit and debit cards and shall be in Indian rupees only.

The Master Directions of the PPI-MD do not allow loading of PPIs from credit lines. Such practice, if followed, should be stopped immediately. Non-bank PPI issuers may be harmed by any non-compliance under provisions in the Payment and Settlement Systems Act, 2007 by the Payment and Settlement Systems Act.

In the past, the PPI business model has raised funds to expand their business, but it is more like an extension of credit. If you are not treating credit lines as a personal loan and there is a loss on it, the regulator is of the opinion that FLDG is an arrangement where a third party compensates lenders if a borrower defaults.

There is no regulation over it, as the regulator is saying that there is no control. If an NBFC or a bank does it, the RBI will have control over it. The issue is about transparency and how to bring it under the ambit of the regulators, the sources said.

Raman Kumar, Chairman of AI-based credit-based platform CASHe, said that the company did not offer PPI cards to its customers, as the regulations were not clear.

'RBI has already announced that they will allow a select group of NBFCs to issue credit cards like banks. Kumar said that we are waiting for the rules to be announced before we file our application with the RBI.

CASHe offers consumer loan products such as quick personal loans and partnership based BNPL credit lines to the salaried millennials.

Since its launch in 2017, the fintech platform has generated more than 20 million 2 crore app downloads and has disbursed loans of over 4,000 crore to more than 4 lakh borrowers.