[Manasi Chandriani Shah is a Solicitor (B.I.L.S)]
Fintech entities, wallet providers, and non-banking financial companies have been mandated to pull the chains on all existing arrangements to facilitate or extend loans through prepaid payment instruments (“PPI”), including cards and wallets. Extending a credit line through any PPI has been prohibited by the Reserve Bank of India (“RBI”). This ban emerges from a directive issued by the regulator on 20 June 2022 (“Directive”).
Addressed to all authorised non-bank PPI issuers, the Directive states that:
- the PPI-MD does not permit loading of PPIs from credit lines;
- any such existing practice is required to be discontinued immediately; and
- any non-compliance in respect of the above, may attract penal action under the Payment and Settlement Systems Act, 2007.
Brief Legal Framework and Practices Prior to the Directive
PPIs facilitate purchase of goods and services, financial services, and remittance facilities, among others. Their issue, loading, reloading and other matters are governed by the RBI’s Master Directions on PPIs dated 27 August 2021 (updated as on 12 November 2021) (“PPI-MD”). The PPI-MD, under paragraph 7.5, permits their loading or reloading by cash, debit to a bank account, credit and debit cards, PPIs (as permitted from time to time) and other payment instruments issued by regulated entities in India. The PPI-MD, under paragraph 7.9, permits PPI issuers (bank and non-bank) to load or reload PPIs through their authorised outlets or through their authorised or designated agents, subject to a host of conditions. These conditions include the following:
- the PPI issuer is responsible as the principal for all acts of omission or commission of their authorised or designated agent; and
- the PPI issuer must ensure adherence to applicable laws of the land.
It appears that under the above framework, PPI issuers, non-banking financial companies, and fintech players had devised structures and practices such as ‘buy now pay later’ and otherwise, by which they granted credit to consumers through PPIs. While it is clear that the Directive prohibits any such direct loading of PPIs from credit lines, there may be arrangements where the credit line passes through the hands of various entities (such as non-banking financial company to fintech entity to PPI issuer) before finally being loaded onto a PPI. A narrow consideration of the final transaction may reveal the PPIs being loaded by debit to a bank account, viz., a permissible mode under the PPI-MD and not restricted by the Directive. However, when considered vis-à-vis the lender granting the credit line and its end user, i.e., holder of the PPI, the monies nevertheless constitute a credit line, routed through one or more entities. Viewed from this perspective, the restrictions under the Directive would be applicable and loading of PPIs in such manner would require discontinuation immediately.
Applicability of Directive to Banks vs. Non-bank PPI Issuers
According to news reports, interpretations are being considered regarding the RBI distinguishing between the category of issuer that has issued the PPI and the inapplicability of the Directive to bank-issued PPIs. It is likely that confusion around any such distinction by RBI is on account of the Directive being expressly addressed to all non-bank PPI issuers. However, on a plain and clear reading, the Directive clarifies what the PPI-MD does not permit, with reference to manner of loading PPIs under paragraph 7.5 of the PPI-MD and consequences of non-compliance. According to paragraph 1.3 of the PPI-MD, the PPI-MD itself applies to all PPI issuers. Hence, based on a combined reading, the clarification under the Directive would apply to both bank and non-bank PPI issuers.
Current Status on Directive
It may be argued that the practice of extending credit lines through PPIs enables better safeguards for ensuring that it is used in accordance with the purpose for which it was granted, and that it facilitates the convenience of cashless transactions. Benefits such as these, commercial considerations combined with the absence of any express rationale for the prohibition, may have left PPI issuers and stakeholders perplexed. It has been reported that the Payment Council of India and other fintech entities have sought government intervention on the Directive.
However, pending any further notification or directive from the RBI on the subject matter, the Directive continues to be in force and effective on and from 20 June 2022, necessitating compliance with it.
– Manasi Chandriani Shah