Industry seeks clarity on RBI norm barring loading of wallets with credit lines

It is not clear if the guideline is meant to prevent lending by PPI issuers, which is anyway illegal, or to curb the widespread industry practice of non-banking financial companies (NBFCs) disbursing loans through wallets instead of cash, executives said.

They pay a fee to the lender and earn a 1.5% interchange each time the customer makes a transaction using the credit line. This model is set to be hit by the latest circular.
They pay a fee to the lender and earn a 1.5% interchange each time the customer makes a transaction using the credit line. This model is set to be hit by the latest circular.

The payments industry has initiated talks with the Reserve Bank of India (RBI) seeking greater clarity on the purpose behind the regulator’s new norm against the loading of prepaid payment instruments (PPIs), or wallets, with credit lines. It is not clear if the guideline is meant to prevent lending by PPI issuers, which is anyway illegal, or to curb the widespread industry practice of non-banking financial companies (NBFCs) disbursing loans through wallets instead of cash, executives said.

The guideline was issued uncharacteristically in the form of a letter to all authorised non-bank PPI issuers, rather than as a notification on the RBI’s website. “The PPI-MD (master directions on PPIs dated August 27, 2021) does not permit loading of PPIs from credit lines. Such practice, if followed, should be stopped immediately,” said the letter sent by the central bank’s Department of Payment and Settlement Systems.

The use of credit lines for loading wallets has business-to-business (B2B) as well as business-to-consumer (B2C) applications. Some NBFCs disburse gold loans, personal loans and even microfinance loans through wallets issued by smaller PPI issuers as a substitute for cash disbursals, an industry executive said. On the consumer side, app-based credit card providers like Slice and Uni use wallets to issue credit lines from banks or NBFCs to their customers. They pay a fee to the lender and earn a 1.5% interchange each time the customer makes a transaction using the credit line. This model is set to be hit by the latest circular.

The industry also wants to understand whether the regulator is making a distinction between credit lines issued by banks and non-banks. “If the notification applies only to non-bank lenders, that means it will only increase NBFCs’ dependence on banks as they will have to route their credit lines through the banking channel,” an industry executive said on condition of anonymity.

The notification could impact players like Slice and Uni, who have been adding a lot of customers through this route, Suresh Ganapathy and Param Subramanian, analysts with Macquarie Capital Securities (India), said in a note on Tuesday. Banks with a large credit card base stand to benefit from it, they said.

According to Macquarie, some of the new generation players were adding close to 200,000–300,000 cards using PPI licences and loading the wallets of consumers using credit lines from NBFCs and banks. Since the main purpose of a PPI licence is to act as a payment instrument and not as a credit instrument, the regulator may not have approved of the use of wallets as a funnel for credit . 

“We also believe many customers were unknowingly taking a line of credit through their wallets at the point of check-out. Some of these practices have not gone down well with the regulator, in our view,” Macquarie said in the note.

App-based credit card providers chose to put up a brave front. “We are committed to being on the right side of regulation in letter and spirit and are working with our partner bank on this,” said Rajan Bajaj, founder-CEO, Slice. The company works as a digital lending platform on behalf of Quadrillion Finance, DMI Finance, Northern Arc Capital and Vivriti Capital.

Some see the latest notification as an early move to regulate digital lending. Sector analysts said that the RBI’s concern possibly stems from the lack of clarity on the end use of funds moving into wallets. Mihir Gandhi, payments transformation leader, PwC India, said that the regulator may be trying to prevent the use of a general-purpose credit line to fund a wallet.

“If a common pool of credit is being opened up and is being used to fund hundreds of needs that the lender has no sight of, that could be a challenge. So if a credit line has to be issued by a lender, it should be a direct line. The mode of issuance will be important,” Gandhi said, adding that the notification may affect banks as well.

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