Lending has always been the end game for most of the fintech companies. A notice from India's central bank has thrown a wrench into the process of lending.
The Reserve Bank of India has banned the practice of loading non-bank pre-paid cards with credit lines in a move that has caused a lot of panic and caused a lot of problems.
Several startup's have used the license to issue cards and then give them credit lines. In order to offer credit lines to consumers, Fintechs usually partner with banks to issue cards and then tie up with non-banking financial institutions or use their own NBFC unit.
The notice from the central bank, which doesn't identify any startup by name, is widely thought to be affecting everyone, including buy now, pay later firms such as ZestMoney who use a similar mechanic to offer loans to customers. Many believe that they may be impacted as well, so they are cautious too.
The rule is very confusing and strange according to a founder of a fintech. According to the Reserve Bank of India, don't load credit line onPPI. Money goes to merchants in the current way. NBFCs can't give credit lines to merchants and their money should only be routed to bank accounts of customers.
The founder said that this new stance risks wiping out all the innovation that has happened in the past five years in the industry, which has attracted over 15 billion dollars in investments in the last two years from scores of high profile backers.
Money first goes to a payments gateway and the money is routed to merchants. The founder said that some banks have been using the same strategy for a long time.
The age-old tactic of using the regulators to save the day has been used by the banks to get this decision.
Not allowing loading of pre paid instruments through credit is aimed at protecting bank’s lazy credit card business from Fintech’s potent BNPL business. It’s a flex move by banks – rent seeking. But market is market and regulation will eventually come around to what market needs.
— Ashneer Grover (@Ashneer_Grover) June 23, 2022
The central bank, which didn't offer an explanation in the notice this week, has been concerned about high interest rates and minimum know-your-customer details for years. Over the last two years, the government agencies have claimed that some of these firms may be engaging in money-laundering schemes.
Some people think that when the licenses were given, they were not given as credit instruments by the Reserve Bank of India. An industry player who requested anonymity said that the Reserve Bank of India may not be okay with the use of thePPI route as an alternative to credit cards.
Everyone is said to be impacted by the new rule.
"We believe this regulation could significantly impact the fintechs involved in this business and would be beneficial to banks as they can further accelerate card acquisition with less competition."
Many argue that the fintech startup exists because they found a way to bring financial inclusion to millions of users, something the Reserve Bank of India has long welcomed. The PPI model, which brings together two regulated entities, allows lenders to give credit to customers at a lower cost, increasing the reach of who can receive credit.
Money is deposited directly into a bank account. When consumers spend money, the lender doesn't earn any money. Since fintech startups earn interchange revenue on every payment, it can be as high as 1.8% in the PPI instruments. They can offer credit at a lower cost to consumers if they choose to do so.
Most people in the South Asian market are not worthy of credit because of India's credit bureau data book. Most Indians don't get credit cards from banks. Fintechs use modern-age underwriting systems to lend to customers and a maze of regulatory arbitrage, which used to be okay until now.
Some argue that the central bank may not be able to make a decision now. In India, the fintechs serve over 8 million customers and without clarity, most of them don't have to meet their payback deadlines.
Different startup NBFCs are regulated. If the Reserve Bank of India really wants to crack down on the use ofPPI as a credit instrument, then they should consider giving credit card license to startup companies, something the Reserve Bank hasn't done yet.
Many startup that are in the middle of raising new funding rounds are starting to see some VCs back out due to investors getting spooked. Some industry players believe that India's central bank is following in the footsteps of China in cracking down on financial services companies. Since the central bank sent a circular, the shares of the government-owned bank in India, State Bank of India, have increased in value.
Wrapped in red tape, China’s startups give up their mainland dreams
The recent statements of the governor of the Reserve Bank of India indicate that they do not want to issue digital banking licenses. Over the past several months, the Reserve Bank of India has been pushing for tighter regulations. The message is clear that fintechs will be regulated more.
There is a possibility that the various charges for payments made in India in a way that encourages digital adoption could come down to encourage more adoption according to the vision document of the Reserve Bank of India. For which regulations have been a light touch so far, it is clear to us that the risks are increasing.
Entrepreneurs are trying to get in touch with the Reserve Bank of India. The Digital Lenders Association of India and Payments Council of India are in the process of writing letters to various ministries to allay their concerns.
Dozens of officials discussed the common grounds for what they should tell the Reserve Bank of India. Extending the timelines for the new rule by six months is one of their pressing requests, according to people who attended the call.
There is a case for why those who operate with full know-your-customer mandates should be allowed to continue.
Large disruptions are expected until there is some clarity. Customers can no longer make transactions on their pre-paid cards.
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