RBI Stops Credit Lines From Fintech Firms

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What is fintech?

Fintech is a portmanteau of the terms “finance” and “technology” and refers to any business that uses technology to enhance or automate financial services and processes.
The term encompasses a rapidly growing industry that serves the interests of both consumers and businesses in multiple ways.
From mobile banking and insurance to cryptocurrency and investment apps, fintech has a seemingly endless array of applications.

The Reserve Bank of India (RBI) has issued a notification disallowing non-bank prepaid wallets and prepaid cards from loading credit lines — preset borrowing limits — into these platforms.
This comes in the backdrop of a boom in credit instruments such as fintech-driven credit cards and buy-now- pay-later wallets.

The banking regulator has clarified that its master direction on prepaid payment instruments (PPIs) does not permit loading of PPIs from credit lines — a practice being undertaken by several fintech credit card companies.
These companies typically tie up with banks or NBFCs and offer credit lines into their prepaid wallets.

The RBI defines prepaid payment instruments (PPIs) as payment instruments that facilitate the buying of goods and services, including the transfer of funds, financial services, and remittances, against the value stored within or on the instrument.
PPIs are in the form of payment wallets, smart cards, mobile wallets, magnetic chips, vouchers, etc.
As per the regulations, banks and NBFCs can issue PPIs.

A credit line is a preset borrowing limit that allows an individual or a business access to credit at any time, as per need.
It can be tapped into by the customer till the limit offered is not exceeded.
It is like a flexible loan as against a lump-sum loan where a fixed amount is borrowed.

With credit products infiltrating the market, there is a renewed push by the regulator to clampdown in the interest of consumer safety.
While some fintechs tie up with banks like SBM Bank, RBL Bank, Federal Bank, etc. to offer these products, some tie up with NBFCs.
Recently, RBI Governor Shaktikanta Das had said that the regulator would soon issue norms to regulate the digital payments

Fintech is one of the hottest sectors in India and abroad, and has attracted record amounts of money,
Burning heavily on aggressive social media advertising, performance marketing, paying influencers to promote their product, and engaging a celebrity or cricketers for brand endorsement.
According to Invest India report, there were 6,636 fintech startups in India as of 2021 and the country’s fintech industry market size was $31 billion in the year and is estimated at ~$150 billion by 2025.

The central bank has left all fintechs confused with its cryptic wording.
These budding startups are now looking for answers on whether this means that they need to stop their core offering altogether and go back to the drawing board.
Already reeling from a slowdown in funding, upending the key product offering, marketing and branding is going to be a question of survival with many risking losing customers in the process.
A fintech founder remarked, “If it actually means what we fear, the move will impact 10-15 million customers who currently use these products.”

Banks have been long concerned about the spurt in the growth of these companies,
Especially that of Slice which had been adding 200,000 to 300,000 per month, at par with leading credit card issuers like HDFC Bank and ICICI Bank.
“These banks have been wanting to know what Slice is doing to achieve such numbers. They have been a worried month after month with their disbursal numbers,” said a source on the condition of anonymity.