RBI’s sanction and its impact on Indian fintech businesses
– Mr. Rohit Garg, Co-Founder & CEO, SmartCoin.
The Reserve Bank of India, popularly known as RBI, is India’s central bank and regulatory body that regulates the Indian Banking System. The RBI also regulates fintech businesses along with other financial institutions. A recent notification by the central bank has left the entire fintech sector confused; the start-ups in the sector are now seeking clarity on the notification to function further.
In June, RBI issued a notification wherein non-bank prepaid instruments (PPI) are not allowed to load credit lines on prepaid instruments. This diktat by the bank is considered to be an attempt to shut down card-based fintech and firms that operate as neo-banks who have merged with banks to give credit cards.
The notification issued by RBI on June 20 reads,” PPI-MD does not permit loading of PPI from credit line”. Addressed to all authorised non-bank PPI issuers, the notification was immediately implemented. The fintech start-ups have now sought extension and clarity from RBI on the notification. Experts have questioned RBI’s decision and advised that the financial regulator should leave space for modern financial companies to offer innovative products and services to consumers.
After the notification was issued, fintech associations and start-ups held a meeting with the RBI, seeking an extension of six-month to implement the recent PPI mandate. Sources at the meeting revealed that the RBI is sceptical about the possibility of people falling into the trap of cards and issuance of credit to the undeserving middle-income or less-income population.
What is PPI?
A prepaid instrument (PPI) is an instrument that can be loaded and reloaded with cash, debit to a bank account, or credit and debit cards before procuring goods and services. This instrument issued by a non-bank PPI can be a smart card, internet account, internet wallet, mobile account, mobile wallet or paper voucher that can be used to derive a credit line for purchasing by a PPI holder.
How will the sanction by RBI impact the Indian fintech businesses?
The fintech market in India is estimated to reach $1.3 trillion by 2025. Keeping up with new-age technology and backing from local and global investors, India now has 21 fintech unicorns and above 4000 fintech start-ups. Over the years, RBI has managed to remain risk-averse toward fintech. However, the RBI now plans to set up a fintech department to facilitate innovation in India’s fintech sector.
The fintech ecosystem has been pushed to difficulties every now and then with updates and mandates in the guidelines on PPI, payments bank, digital lending, credit cards or crypto.
There are instances of loss that happened due to RBI’s guidelines-the rolling out of the Unified Unified Payments Interface (UPI) and implementation of stringent obligations to ensure KYC compliance in 2017 led to the loss of appeal in offering wallet services and the scrutiny in digital lending, prepaid payments instruments and buy now pay later (BNPL) raised concerns and effected the entry of international firms.
While some guidelines and mandates by RBI did impact the rise of organisations in the financial sector, the current issue of non-bank PPI needs to be addressed properly by RBI. It should clarify to what extent this notification will be applicable and provide sufficient time to fintech start-ups to ensure proper decision-making.
With the advancement of technology and economic growth, the fintech start-up ecosystem of India is expected to expand. Therefore, it is imperative that all stakeholders must identify the vital problems in the initial stage and work together to implement strong solutions.