Developments in India’s credit card, BNPL regulation

By Anu Tiwari and Pallavi Rao, Cyril Amarchand Mangaldas

An advent of regulatory developments, compliances and challenges for India’s credit cards and buy-now-pay-later (BNPL) ecosystem dawned in the first quarter of this 2022-23 financial year. In April, the Reserve Bank of India (RBI) issued new directions that consolidate and clarify regulatory requirements that apply to credit cards, charge cards and debit cards. While the directions sought to provide conceptual clarity on the definition of credit cards, the scope of the term may now also extend to certain BNPL models if they are physical or virtual payment instruments that contain a means of identification, are issued with a pre-approved credit limit, and may be used to purchase goods and services or draw cash advances.

Anu Tiwari Cyril Amarchand Mangaldas
Anu Tiwari
Cyril Amarchand Mangaldas

At present, the regulatory framework applying to the BNPL segment is comparatively easier for fintech firms to navigate, particularly as several entities hold licences to issue prepaid payment instruments (PPIs), while credit card issuers are almost exclusively banks. The conduct of credit card-issuing entities is also subject to tighter regulatory norms. The BNPL segment in India has been awaiting regulatory clarity on business models. But the need of the hour is for proportional regulations that retain the ability to spur innovation in models.

It is important for regulators to keep in mind that BNPL products typically cater to sections that may not be able to access other credit channels, due to insufficient credit history or an unsatisfactory credit score. Fintechs operating in the BNPL ecosystem have the ability to solve this problem by devising alternative channels of creditworthiness assessments that take into account several new data points, as well as ensuring compliance with the regulatory requirement of credit disbursement only through licensed financial institutions.

According to several industry studies and estimates, the BNPL segment is primed for robust growth. The leading stock brokerage, HDFC securities, estimated earlier this year that “pay later” merchandise value was projected to grow 74% year-on-year, becoming a USD56 billion market by March 2026.

The wait for greater regulatory clarity on BNPL models is also in the background of impending RBI regulations on digital lending, which is likely to implement recommendations made in November 2021 by the RBI’s working group on digital lending. It is likely that digital lending platforms may cover certain BNPL models, although the contours of such regulatory overlaps between different frameworks remain to be seen.

Pallavi Rao Cyril Amarchand Mangaldas
Pallavi Rao
Cyril Amarchand Mangaldas

BNPL entities that structured their product as a PPI pursuant to the RBI Master Directions on Prepaid Payment Instruments, dated 21 August 2021 (updated on 12 November 2021), also faced disruptions arising out of RBI clarifications issued on 20 June 2022, which were addressed to authorised non-bank PPI issuers.

Co-branding arrangements in relation to PPIs were closely regulated by the RBI in any case, with stipulations that in respect of co-branding arrangements between a bank and a non-bank entity, the bank is required to play the role of the PPI issuer, and the role of the non-bank entity is restricted to marketing and distribution, and providing the PPI holder access to offered services.

As a matter of industry practice, fintech firms entered into arrangements with banks or non-banks authorised by the RBI to operate as PPI issuers, and relied on third-party funding from licensed credit institutions to pre-fund PPIs. The clarifications direct that PPIs may not be loaded from the credit line, and such practice should be stopped immediately.

Following the clarifications, the business model requires rethinking, especially as the RBI has not issued specific guidance on the term credit lines. The RBI’s issuance of clarifications to only non-bank PPI issuers has also resulted in a differential regulatory environment for bank-issued PPIs, although it is not certain whether this was intended. As the industry continues to grapple with such regulatory challenges, it is useful to look at the regulatory approaches towards BNPL in neighbouring Asian economies, which are also in the process of studying the conduct of entities and the effects of BNPL products and services.

Singapore has launched a BNPL Working Group through the Singapore Fintech Association under the guidance of the Monetary Authority of Singapore that is working on developing a code of conduct for all BNPL providers, seeking to mitigate the risk of consumer over-indebtedness and establish minimum safeguards to protect consumer interests.

Bank Negara Malaysia is co-ordinating with other financial sector regulators to enact the Consumer Credit Act, which will establish a Consumer Credit Oversight Board to govern consumer credit and BNPL. The Indian BNPL industry must be welcomed to the discussion table to chart a regulatory path towards compliance, while ensuring customers benefit.

Anu Tiwari and Pallavi Rao are partners at Cyril Amarchand Mangaldas. Director of public policy Arjun Goswami and senior associate Ganesh Gopalakrishnan also contributed to this article

Cyril amarchand

Cyril Amarchand Mangaldas
Peninsula Chambers

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