RBI's new credit card issuance rules: Three key points explained

This becomes more important in the current scenarios where we have fintech startups with NBFC licenses of their own issuing prepaid cards in partnerships with banks. On the other had we have large NBFCs such as Bajaj Finance waiting for the green signal to go big in the credit card space.

What does the Master Direction say?

The document reads, “Non-Banking Financial Companies registered with the Reserve Bank shall not undertake credit card business without prior approval of the Reserve Bank.” The positive here is that now NBFCs can issue credit cards if they are successful in securing the regulator’s nod.

Further, RBI requires these entities to have a Certificate of Registration, a pre-requisite for which is a minimum net owned fund of Rs 100 crore.

For co-branded cards, RBI has said that the role of the co-branding partner entity shall be limited to marketing and distribution of the cards. Additionally, the co-branding partner shall not have access to information relating to transactions undertaken through the card.

What this means for large NBFCs

Moneycontrol had reported on February 8 that the RBI is likely to set stringent conditions before allowing NBFCs to issue credit cards, including minimum net worth, liquidity measures and adequate cybersecurity.

“There are around 15 large NBFCs in the country that are regularly monitored by the RBI. They could become the first few institutions to become eligible for this,” a source had said. Besides Bajaj Finance, which has the highest net worth among NBFCs, players such as Aditya Birla Capital, M&M Financial Services, Sundaram Finance, L&T Finance Holdings, IDFC Ltd, Tata Investment Corp etc. can be eligible to seek RBI’s nod.

Allowing NBFCs to issue credit cards will improve financial inclusion in the country and expand the pool of credit card holders in a country which has abysmally low penetration of credit cards of just 3-4 percent.

“This is a very positive move for NBFCs. Companies had been requesting RBI for a nod since long, now it seems like this may proceed further,” said Raman Aggarwal, Director of the Finance Industry Development Council (FIDC) which is a representative and self-regulatory body for NBFCs.

However, further clarity on this will be required in the form of clear guidelines by the regulator. It is not immediately clear if or by when RBI will be looking to issue any such guidelines. Besides a minimum net worth, the banking regulator may also put in place liquidity requirements. It may also look into the IT infrastructure and cybersecurity measures, as cards could also be issued digitally, according to sources.

What it means for card-issuing fintechs

New-age fintechs are extending credit by offering Buy Now Pay Later (BNPL), EMIs, prepaid cards or even allowing consumers to split bills in three or more installments. Players such as Slice, Uni and LazyPay are issuing credit-linked cards to customers through bank tie-ups.

RBI’s Master Direction raised some questions over these products when it said that NBFCs cannot issue credit cards or ‘similar products’ without RBI’s approval. However, a look into the models of these players shows that the issuer is the partnering bank.

Slice, for example, has an NBFC called Quadrilion Finance which does not issue its cards. Its tech company GaragePreneurs Internet Private Limited acquires customers in partnership with State Bank of Mauritius (SBM) India. Uni and LazyPay’s cards too mention the names of the banking partners.

An option to issue credit cards of their own, along with clear guidelines will open up a host of opportunities for these fintechs.

“Having Net Owned Funds of Rs 100 crore is not an issue for these fintechs, considering the inflow of funds. They can always seek RBI’s approval,” said a fintech industry executive who did not wish to be named.

The offerings by these fintechs are a step towards bridging the credit gap in the country with a focus on on sub-prime and new-to-credit customers, categories that bank credit cards do not cater to. Yet, role of BNPL, digital lending and credit-linked cards has been debated since a while and the industry is still awaiting clear guidelines.