Monday’s Circular (RBI) issued Monday follows widespread discussions the banking regulator has had with industry stakeholders as it seeks to understand the business models of lenders’ startups, including credit card-based fintechs, while it aims to release digital lending standards in July. sources aware of the talks told ET.
The banking regulator believes that, unlike traditional lenders, fintechs lack sufficient capital and credit capabilities, said a person familiar with the matter.
‘No position to withstand shock’
Therefore, these companies are unable to withstand shocks that would reverberate through the financial system, ultimately harming the most vulnerable borrowers that these companies originally sought to serve by providing access to loans. In addition, prepaid payment instruments (PPIs) are transaction vehicles for a customer to spend his/her own money — not borrowed money that involves judgmental subjects such as customer data and the ability to pay back, the aforementioned person said. As a result, the regulator has now banned new-age fintech firms from loading credit lines on PPIs, instruments that by their very nature do not involve credit ratings.
Fintech firms, for their part, likened the order to giving traditional banks significant control over the industry’s innovation stack, potentially impacting their business models.
“The RBI seems to be concerned that control is in the hands of fintechs and wants to move it entirely to banks,” said one of the entrepreneurs ET spoke to. His startup would be one of those likely to be affected by the new regulations.
Some companies, including EarlySalary, have temporarily disabled all future transactions to comply with the RBI’s dictate, according to the notice sent to customers on Tuesday. ET reviewed the company’s note.
Separately, the Tiger Global-backed unicorn Slice and Uni Cards, among others, are also likely to be directly affected by the order. Rajan Bajaj, founder and CEO of Slice, said his company also analyzed the letter from the RBI with its partner banks. “We are committed to complying with all applicable laws,” he added.
Even as the fledgling fintech industry adopts the new standards, industry associations such as the Digital Lenders’ Association of India (DLAI) and the Fintech Association for Consumer Empowerment (FACE) are seeking regulator relief and pushing for delays in implementation timelines. Companies told ET they will seek clarity on the applicability of the rules to bank-led wallets, the treatment of customers already living with these products, and adjustments to current business models to keep customers on board. In a statement late Monday night, the regulator ordered non-bank issuers of PPIs to immediately stop loading portfolios with lines of credit. “The problem is in the word ‘line of credit’. It is fair if a line of credit is provided by a PPI player or an unregulated entity. But technically it shouldn’t be a problem if both the NBFC partner and the PPI are regulated by the RBI,” said a payments industry director on condition of anonymity. “The letter sent is very unclear as there is no preamble, and everyone is trying to understand the intent behind this decision. But should NBFCs now go back and pay out loans in cash so they can get back on the country’s agenda on digitization?” Payments industry insiders said the rules will apply to all wallets used to load lines of credit. The interpretation of the guidelines suggests that the RBI wants these companies to apply for a “credit card license” before launching such products. In April, the regulator had said that non-bank lenders cannot issue credit cards or “similar products” without approval from the RBI.
cast in stone
“With the communication, the RBI has made it very clear that it is not interested in this circuitous route to provide credit. For now, fintechs that use a prepaid BIN and provide lines of credit through NBFC partners are under the radar. However, there are talks that this is also can apply to banks’ PPI BINs,” says a second entrepreneur in the payments industry.
The regulator has been hesitant for some time with credit products, such as Buy Now Pay Later (BNPL). Since January, it has started conducting surveys and seeking details on business models, customer segments and default rates of BNPL players. “Recent communications from the RBI highlights the lack of visibility of lines of credit that occurs when a loan is provided through a PPI instrument,” said Mihir Gandhi, Partner, Leader – Payment Transformation, PwC India. “PPIs must go through at least minimum KYC where the bank knows who the customer is, which may not be the case with the credit-based PPI use case. Lenders (banks and fintechs) need to know who the loan is being given to, finally .” Sources aware of the development said the RBI is concerned that defaults of up to 10% on BNPL books could lead to systemic risk, with non-banks involved in facilitating these lines of credit. The surveys also revealed weak adoption and poor know-your-customer (KYC) practices, followed by some companies.
“We need more time to comply; there needs to be an easy path to issue cards and that requires a regulatory change,” said a fintech operator of cards. “BNPL products have done very well in the non-bank segment and if these products are discontinued we will never be able to get them into the formal ecosystem.”
Until there is clarity, the fintech industry has taken a wait-and-see attitude with the companies that are in consultation with the regulator.
“We are in contact with the RBI and it will take a few days to get clarity on the order — whether it will affect credit card challengers who work with banks,” said the founder of another startup.