After imposing restrictions on non-bank Buy Now Pay Later (BNPL), the Reserve Bank of India (RBI) is likely to issue guidelines for the BNPL segment that used prepaid instruments (PPI) to extend short-term, interest-free loans to customers for online purchases.
“This new method will be reviewed and the issuance of appropriate guidance on payments involving BNPL will be explored,” the central bank said in its Payments Vision 2025 document. BNPL – to stop issuing cards where funds are loaded via a credit line from NBFCs, sending jitters in the segment.
According to banking watchers, the Reserve Bank is unhappy with fintech companies using PPIs as a credit instrument, circumventing regulatory oversight. The banking regulator is in discussion with fintech players to find a way out and include the segment in a regulatory framework so that PPIs are used as a payment instrument and not as an avenue of credit.
While BNPL services have become a new payment method alongside existing payment methods like cards, UPI and online banking, they have remained outside direct RBI regulation. This channel, facilitated by a few payment aggregators, leverages the existing nodal account (escrow account after authorization) to route payments between a BNPL customer and a merchant. “We welcome RBI’s decision to ban wallet and PPI from credit lines. This will bring more transparency to the fintech lending space. We believe that the main purpose of a PPI license is to act as a payment instrument and not as a credit instrument,” said Nipun Jain, CEO of RapiPay Fintech Ltd.
The latest regulation likely stems from recent developments in which new credit-based payment product business models have been created by companies using PPI as a vehicle, analysts said. The RBI has raised concerns about funding these PPI instruments via a line of credit from an NBFC, Kotak Securities said in a report.
How does a BNPL company work?
A customer with a BNPL card or account can make a purchase at a participating merchant and opt for the “Buy now, pay later” option. After purchase, the customer can repay BNPL in a series of interest-free EMIs – unlike credit cards which carry a high interest rate of 42% – spread over 3 months or as a lump sum. If it remains unpaid, interest will be charged. BNPL will immediately pay the merchant. However, for a purchase of Rs 500, instead of paying the full Rs 500, they would pay something like Rs 470 or Rs 450 and pocket the difference. The merchant undertakes to grant a discount to BNPL.
The RBI’s Digital Lending Task Force had recently proposed to restrict on-balance sheet lending through Digital Lending Applications (DLAs) only to central bank regulated entities or entities registered under any other law to specifically undertake lending activities, enacting separate legislation to prevent illegal digital lending activities and the treatment of BNPL as part of on-balance sheet lending, and prohibiting unregulated entities from offering first loss default guarantee (FLDG).
Another major factor worrying the RBI could be the high levels of delinquency in the BNPL segment. In the case of 60-day-overdue credit (DPD), delinquencies in the BNPL segment are 18.9% while non-BNPLs show 10.1% delinquencies, according to data from TransUnion Cibil.
BNPL is the fastest growing online payment method in India, with significant impact on banks, large merchants and card schemes. Due to its hassle-free onboarding experience, extended credit facility, low cost structure for the client and ease of repayments, BNPL is increasingly popular among young employees.
Some of the popular BNPL companies are LazyPay, Simpl, ZestMoney, Amazon Pay Later, Ola Money Postpaid, Paytm Postpaid, Flexmoney, Slice, UNI, and EPayLater.
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“Regulatory clarity for big tech and fintechs as well as BNPL will really help entities plan for the long term and invest even more in fintechs in India,” said Avinash Godkhindi, MD and CEO of Zaggle.
The RBI’s ban on NBFC lines of credit is likely to affect fintech companies in the BNPL segment. BNPL companies are active on Zomato, Swiggy and other e-commerce sites.
For customers around the world, e-commerce payment preferences continue to shift from cash and credit cards to digital wallets and BNPL. In its report “Digital Payments in India: A US$10 Trillion Opportunity”, BCG stated that the digital payments market in India will be worth US$10 trillion over the next five years (by 2026) , with non-monetary contributions accounting for 65% of all payments. and two out of three transactions will be digital in the next five years.