Pre-paid card comeback may have bolstered the case for NBFCs' plastic play

With pre-paid card players back at the drawing board, the case for the entry of NBFCs into plastic may have got stronger

Last Thursday, the Financial Stability Report (FSR, June 2022) noted that “the advent of fintech has exposed the banking system to new risks which extend beyond prudential issues and often intersect with other public policy objectives relating to safeguarding of data privacy, cyber security, and consumer protection.”

This observation in the Reserve Bank of India’s (RBI’s) bi-annual publication is a clear indicator that fintech firms and their private equity backers may have to war-game from here on — and the central bank’s earlier diktat that pre-paid instruments (PPIs) cannot be funded from credit lines of non-banking financial companies (NBFCs) should be re-read after the release of the latest FSR.

While the RBI has not elaborated on why it did what it did on PPIs, it is clear as daylight that the instrument was being used to skirt regulations around the entry of NBFCs into the credit-cards business. A PPI has to be funded by the holder of the instrument — either from a bank account (debit card), or credit card. Of course, there could be instances where a company may issue a PPI to an employee, but that exposure is not by way of “credit”, and is only to enable business-related expenses and to cut back on reimbursement snafus.

Now, it could be argued that funding a PPI from a credit-card limit is no different from availing of a credit line from an NBFC for the same purpose. “But in that case, nobody is masking the arrangement. The short point is that a PPI can’t masquerade as a credit card,” says a senior banker.

Neither fish nor fowl
 

“The foremost priority is compliance with extant regulations, and we are seeking clarity regarding the applicability to bank-led PPIs, as the specific communication is addressed to non-bank PPIs,” says Sugandh Saxena, chief executive officer of the Fintech Association for Consumer Empowerment.

She reckons that an equally important consideration is the approach for cards (PPIs) already in the market, to minimise customer inconvenience. “As a fintech lending community, a regulatory framework for digital lending with a clear and certain path is pivotal for the development of digital lending,” she adds.

Whispers abound that it was a lobby of banks that “engineered” the RBI crackdown. The grapevine points to the fact that the RBI’s master direction of April 21, 2022 (‘Credit Card and Debit Card — Issuance and Conduct Directions’) had been issued by the Department of Regulations, but the one which barred funding of PPIs through credit lines from NBFCs had been issued by the Department of Payment and Settlement Systems.

“I think there’s a case to clarify the regulatory position on two RBI-regulated entities working together in partnership so that the industry is not unduly affected,” says Naveen Surya, chairman emeritus, Payment Council of India, and founder of the FinTech Convergence Council.

He says categorically that “fintechs which are offering these products have a key role to play to drive inclusion and digitisation of financial services, along with other regulated entities.” The other worry is that nearly $400 million in PE money is said to be riding on PPIs, and the RBI position on funding has put a question mark on the status of these investments.

Bye now, pay later

The RBI’s stance that fintechs can’t fund PPIs via credit lines has unwittingly brought an old issue into sharp relief: whether non-banks can issue credit cards. What’s lost in the din after the recent RBI “clarification” on PPIs is that these arrangements were put in place by fintechs, as only banks are currently allowed to issue credit cards (though an RBI circular of 2004 had made it explicit that non-banks can also issue them, provided they had a net worth of Rs 100 crore — a point that was reiterated in a recent master direction as well).

“I look at the RBI’s move as a grand bargain. If you do want to offer credit, do come and apply for a credit card licence; don’t use the PPI route for this,” says Saurabh Tripathi, partner & director (Financial Institutions Practice) at the Boston Consulting Group. “I think they are concerned about overheating in the retail space, as delinquencies are going up. That said, I hope the RBI issues a credit card licence to some of the smaller players as well.”

What we are now seeing is the convergence of several fault lines, which has created a deep, wide trench in the industry. This should be located in a larger context as well: the impact of this on spur-of-the-moment spending, which is a big driver of retail credit.

It has been pointed out that the RBI may also be concerned that the PPI route could be leading to a bubble in the buy-now-pay later (BNPL) segment. The aggregate loans given via the BNPL route is not known, though the Report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps last November gave a sense of it.

The report noted that “even though the amount disbursed under BNPL schemes is only 0.73 per cent (banks) and 2.07 per cent (NBFCs) of the total loans disbursed, the volumes (number of loans) are quite significant.” On the digital lending mode itself (and not restricted to BNPL), disbursements by RBI-sampled entities exhibited a more than twelve-fold increase to Rs 141,821 crore in FY20, from Rs 11,671 crore in FY17. 

Delinquencies a worry

Delinquencies could be another worry. The FSR, December 2021 observed that the retail credit growth model is facing headwinds: delinquencies have risen, and the new-to-credit segment is showing a dip in originations. It referred to the Bank for International Settlements’ noting that in emerging markets, bad loans “typically peak six to eight quarters after the onset of a severe recession.” 

According to the FSR, their delinquency levels shot up by 274 basis points (bps) to 4.56 per cent in the year to September 21. State-run banks did report the highest figure for this period on this aspect at 5.03 per cent, but it was an improvement of 45 bps.

The latest FSR shows that fintech delinquencies in March 2022 were 2.26 per cent — an improvement of 350 bps. State-run banks, too, fared better at 4.45 per cent — an uptick of 58 bps. The volume of enquiries indicates that loan demand has increased substantially after the second wave of the pandemic across all borrower categories, with home loans and loans against property recording the maximum growth.

The moderation in enquiries with banks, NBFCs and housing finance companies (which began after December 2021 due to the emergence of Omicron) continues, but there has been a significant rise in the case of fintechs. A credit inquiry is created when a borrower applies for a loan and permits the lender to pull their credit record.

Enquiries are among the first credit market measures to change in credit record data in response to changes in economic activity. That said, the proportion of portfolios at 90-days-past-due or beyond — a measurement of impairment in consumer credit — has stabilised across lender categories.

Whichever way you look at it, a new plastic regime has dawned.

Types of pre-paid instruments

Closed PPIs: These are issued by an entity for facilitating purchases from that entity (say, a big retailer) only, and don’t allow cash withdrawals, and cannot be used for payments or settlement for third-party services

Semi-closed PPIs: These are used for transactions at a group of clearly identified merchants which have a specific contract with the issuer. No cash withdrawals are permitted, irrespective of whether they are issued by banks or non-banks

Open PPIs: These are issued only by banks and can be used at any outlet. Such PPIs facilitate cash withdrawals at ATMs, point-of-sale and through business correspondents