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‘s (reserve Bank of IndiaThe circular issued on Monday follows the banking regulator’s extensive discussions with industry stakeholders as it seeks to understand the business model of lending startups, including credit-card-based fintechs, while extending the issuance of digital lending norms by July. The goal is, many sources are aware of. The Conversation told ET.
A person familiar with the matter said the banking regulator believes that unlike traditional lenders, fintechs lack adequate capital and credit underwriting capabilities.
‘Not in a position to withstand shock’
Therefore, these companies are not in a position to suffer the shocks that will reverberate through the financial system, hurting the most vulnerable of borrowers these companies originally intended to serve by providing access to loans. In addition, prepaid payment instruments (PPIs) are the transactional vehicle for a customer to spend his money – not borrowed money which brings into the equation decisive topics such as customer credentials and ability to repay, the person mentioned above said. Told. As a result, the regulator has now banned the new age fintech Companies from loading credit lines PPITools which by nature should not involve assessment of creditworthiness.
For their part, fintech companies likened the order to give traditional banks significant control over the sector’s innovation stack, potentially influencing their business models.
“It seems that RBI is apprehensive of the control of fintech and wants to shift it completely to banks,” said an entrepreneur who spoke to ET. His startup will be among those affected by the new rules.
According to their communication sent to customers on Tuesday, some companies, including EarlySalary, have temporarily disabled all future transactions to comply with the RBI order. ET has reviewed the company’s note.
Separately, the Tiger Global-backed Unicorn Slice and Uni Card, among others, are likely to be directly affected by the order. Slice founder and CEO Rajan Bajaj said his company is also analyzing RBI’s letter with its associate banks. “We are committed to complying with all applicable laws,” he said.
‘Delayed Implementation’
Even as the fledgling fintech industry comes up with new norms, industry groups such as the Digital Lenders Association of India (DLAI) and the Fintech Association for Consumer Empowerment (FACE) are seeking relief from the regulator, seeking to suspend Emphasizing on. implementation timeline. The companies told ET that they would like clarity on the enforcement of the rules on bank-led wallets, dealing with existing customers with these products and changes in the existing business model to continue on-boarding customers. . In a communication late Monday evening, the regulator directed non-bank issuers of PPIs to immediately stop loading wallets with credit lines. “The problem is with the term ‘credit line’. This is appropriate if the line of credit is provided by a PPI player or an unregulated entity. But technically this should not be a problem if both the NBFC partner and the PPI are regulated. RBI,” said a payments industry executive on condition of anonymity. “The letter sent is very vague as there is no preamble, and everyone is trying to understand the intention behind this decision. But should NBFCs now go back and lend in cash by going back on the country’s agenda on digitization?” Payments industry insiders said, adding that the rules would be applicable to all wallets used for loading credit lines. The interpretation of the guidelines suggests that the RBI wants these companies to take “credit card licenses” before launching such products. In April, the regulator had said that non-bank lenders cannot issue Credit Card or ‘Like Product’ without the approval of RBI.
cast in stone
“With the communication, the RBI has made it very clear that it is not keen on this winding path of credit delivery. For now, fintech radars using prepaid bins and providing lines of credit through NBFC partners However, there are talks that this bank may extend to PPI Bins as well,” said another payments-sector entrepreneur.
The regulator has been cautious on credit products like Buy Now Pay Later (BNPL) for some time now. From January onwards, it started conducting surveys and sought details on the business model, client segment and crime rates of BNPL players. Mihir Gandhi, Partner (Payment Transformation), PwC India said, “RBI’s recent communication indicates lack of credit line visibility, which occurs when loans are disbursed through PPI instruments.” “PPIs have to go through at least minimal KYC where the bank knows who the customer is, which may not be the case with a credit-based PPI use-case. Credit issuers (banks and fintechs) need to know about this. There is a need to be aware who the customer is in the end the loan is given.” Sources privy to the developments said that while the RBI is concerned that the default rate of up to 10 per cent on BNPL books could pose systemic risk, non-banks are involved in facilitating these credit lines. Its surveys also revealed weak underwriting and poor know-your-customer (KYC) practices followed by some companies.
Compliance Deadline
One card fintech operator said, “We need more time to comply; there needs to be a convenient way to issue cards and to do that we need a change in regulation.” “BNPL products have performed very well in the unbanked segment and if these products are discontinued, we will never be able to bring them into the formal ecosystem.”
Until clarity emerges, the fintech industry has adopted a wait-and-watch approach with companies engaged in consultation with the regulator.
“We are in touch with RBI and clarity on the order will take a few days – will it impact credit card challengers working with banks,” said the founder of another startup.