RBI, PPI companies in talks; central bank not in favour of innovation based on regulatory arbitrage

The Reserve Bank of India (RBI) is in talks with pre-paid instrument (PPI) issuers in the wake of last week’s clarification, with the central bank not keen on encouraging innovation that is fuelled by regulatory arbitrage, according to a person aware of the deliberations.

“The RBI has only clarified what was already there. The idea is that innovation should not exclusively base itself on regulatory arbitrage,” the aforementioned person told Moneycontrol on condition of anonymity.

“If one entity requires a licence to do a certain activity, the RBI cannot let some other entity, in the name of innovation, do the same thing without a licence. So, there is nothing against innovation itself,” the person added.

On June 20, the RBI issued a clarification that current rules did not permit non-banks to allow loading of PPIs such as wallets and prepaid cards using credit lines.

The clarification from the central bank, which is yet to be made public on its website, further said such activity should be stopped immediately and that any non-compliance could attract penal action.

The clarification is widely thought to endanger the existence of players in this space, with a number of financial technology companies having become increasingly visible on the back of such activities.

Moneycontrol had reported on June 22 that industry bodies such as the Internet and Mobile Association of India (IAMAI) and Payments Council of India (PCI) would be making representations to the central bank and the government on the matter.

According to the person aware of the matter, these discussions have begun.

“The RBI has been discussing it with stakeholders over the last few days. And the sense it is getting is that the actual amounts involved is actually not very high. There are only one or two relatively large players in this space. The discussions are going on.”

“It turns out that more players were doing it than the RBI initially thought. The feedback it has got is that there aren’t too many players who are doing it and there are not too many customers who are involved. Most players who are doing it have other lines of business. It’s not something that affects business that significantly for anyone. So, it’s not something that will create a major disruption,” the person added.

When asked what the nature of these talks was given that the clarification issued by the RBI was self-explanatory, the person said the business models used by the fintech firms require to be discussed in greater detail.

“In loading of PPIs from credit lines, there are many models. Fundamentally, there are about three models: one is just like a credit card; the other is you get a loan, that loan is passed on to the PPI holder as card loading; in the third model, the PPI holder gets a loan from somewhere but once he spends that loan, it’s over. So, it depends on the model.

These are details the RBI needs to know. And since they are not all regulated entities, the RBI does not talk to them as often as it talks to banks, for instance,” the person explained.

As per a June 24 report by news agency Press Trust of India, fintech companies want a one-year transition period to move away from activities the RBI has clarified are not permitted by the rules.