RBI restricts non-bank fintechs from extending credit lines on e-wallets

The Reserve Bank of India said in a letter that prepaid payment instrument providers — largely e-wallets — are not allowed to offer non-bank credit lines. The letter, which has not been posted on RBI’s website, was reviewed by Entrackr through a source.

The clarification could have significant implications for mobile wallets that include a credit line from non-banking financial companies. While the implication of this move is yet to be analyzed, sources say that it could disrupt the operations of well-funded companies such as Slice, Uni and Paytm.

Currently, platforms like Slice and Uni offer Pay Later cards that claim to be credit card challengers, where users can apply for cards through a 100% digital process in their mobile app.

How it works is that the credit underwriting is done in a partnership with the NBFCs and card issuance with a bank.

Slice says on its website that it underwrites its credit limit with Quadrillion Finance and has SBM Bank for card issuance. Similarly, Uni has four partner NBFCs listed on their website and partners with RBL Bank for card issuance.

Paytm has recently started bundling its wallet with its Postpaid credit product; it’s unclear if this sort of arrangement is now likely to continue, depending on whether Paytm is sourcing the credit line for the loan from an NBFC or a bank.

“This move won’t make a difference when a bank is underwriting the loan but if an NBFC is involved in the underwriting then e-wallets won’t be allowed to offer credit lines,” an industry source said, requesting anonymity.

"The [Master Directions on Prepaid Payment Instruments do not permit loading of PPIs from credit lines. Such practice, if followed, should be stopped immediately. Any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007," the RBI said in the letter.

The law cited by the RBI allows it to impose compounding fines on entities that violate the master directions on PPIs.

This clarification is reminiscent of the Chinese crackdown on Ant Financial, where the all-in-one mobile wallet app Alipay was forced by regulators to spin off its credit products into separate apps, effectively returning control of microloans to the banking sector.

Unlike in that case, though, the regulatory intervention here simply appears to involve reiterating existing regulations and warning startups who may have taken legally risky choices in what they saw as a grey area in regulations to provide micro-lending through e-wallets to change course. This may be why PPI license holders haven’t all acted in the same way — Ola, for instance, has a prepaid wallet as well as a buy now pay later (BNPL) product, but users cannot use the latter to load credit to the former.

The central bank is not averse to wielding its supervisory powers to penalize fintechs, payment networks and banks for regulatory lapses. For close to a year, it had banned banks from issuing new Mastercard cards owing to what the regulator said was insufficient compliance from the payment network with a data localisation directive.

Earlier this year, Paytm Payments Bank was restricted from onboarding new customers pending an audit of its IT systems. The regulator in February warned customers of the carpooling app sRide that the firm was offering an e-wallet service without due authorisation.