Is India’s central bank going the China way? – TechCrunch

Nearly allLending has been the ultimate goal for fintech startups. A notice from India’s central bank this week has thrown a wrench into the ecosystem, scrutinizing just who all can lend.

The Reserve Bank of India has informed dozens of fintech startups that it is barring the practice of loading non-bank prepaid payment instruments (PPIs) – prepaid cards, for instance – using credit lines, in a move that has prompted panic among – and existential threat to – many fintech startups and caused some to compare the decision to China’s crackdown on financial services firm last year.

Slice, Uni, Uni, and KreditBee are just a few of the many startups that have used the PPI licenses to issue and equip cards. credit lines. Fintechs often partner with banks to issue cards. They then tie up or use their own NBFC units to offer these cards. creditLines to consumers.

The central bank’s notice, which doesn’t identify any startup by name, is widely thought to be impacting just about everyone including buy now, pay later firms such as ZestMoney who also use a similar mechanic to offer loans to customers. Many are also cautious about Amazon Pay, Paytm Postpaid or Ola Money as they may be impacted.

“The rule is very confusing and strange,” saidA fintech founder under anonymity to keep RBI officials from being upset. “What the RBI is essentially saying here is that don’t load creditPPI. PPI works in a way that money eventually goes to merchants. You’re saying now that NBFCs can’t give credit lines to merchants and their money should only be routed to bank accounts of customers.”

The founder stated that this new stance could erase all the innovation that had occurred in the fintech sector over the past five years. This industry has attracted more than $15 billion in investments in two years, from scores of high-profile backers such as Sequoia India and Southeast Asia and Tiger Global, Insight Partners and Accel.

“The way everyone works right now in the fintech space, with maybe one degree of separation where money first goes to a payments gateway, the money is routed to merchants. Some banks have been employing the same strategy for like a decade!” the founder added.

Fintech startups believe banks have lobbyed RBI to reach this decision. This is the old tactic where incumbents cry foul but rely on regulators to save the day.

The central bank, which didn’t offer an explanation in the notice this week, has long expressed concerns about lenders who are charging exorbitant interest rate and requiring minimum know-your-customer details to on-board and coerce customers. The government agencies claim that some of these companies may be involved in money laundering schemes over the past two-years.

“Some people are speculating that when the PPI licenses were given, RBI was clear that they are not given as credit instruments. The PPI+BNPL combination is now being used as an option. credit cards or offer seamless BNPL, which RBI may not be okay with as of today,” saidAn industry player who requested anonymity.

The new rule is saidThis could have a negative impact on not only shark lenders and sketchy players but all people.

“We believe this regulation could significantly impact the fintechs involved in this business and would be advantageous to banks, as they can further accelerate card acquisition with less competition,” analysts at brokerage house Macquarie wrote earlier this week.

The fintech startups exist, many argue, because they found a way to bring financial inclusion to millions of users, something the RBI has long welcomed and a fact that banks would appreciate if you didn’t bring up. The PPI model, which combines two regulated entities, allows lenders to offer a range of products and services. creditCustomers can be reached at a lower price, thereby increasing their reach. credit.

“In the traditional personal loan model, lender deposits money directly into bank account. So, the lender doesn’t earn any money when the consumer spends that money,” explained Himanshu Gupta, a fintech veteran. “But in the PPI instruments backed by creditLine model: Fintech startups can earn interchange revenue from every payment. This could be as high as 1.8%. This allows them to offer potentially unlimited services. credit at lower cost to consumers as compared to a pure ‘personal loan into bank’ model,” he added.

India’s creditBureau data book is very thin, rendering most South Asian market participants unworthy of it. credit. As a result, banks don’t offer creditIndians can get loans or cards. Fintechs use modern-age underwriting systems to lend to customers and a maze of regulatory arbitrage – all considered okay until now – to operate.

Some believe that the central bank may be too late to make an immediate decision. India has more than 8 million fintech customers. However, there is no clarity about the obligations of most customers to pay their current due dates. This could create significant stress for firms.

Furthermore, regulated entities are also available for NBFCs that are run by different startups. Some fintech veterans argue, however, that the RBI needs to take steps to reduce the use of PPI. creditThey should seriously consider giving it if they have the right instrument credit card license to startups, something the RBI hasn’t done to date.

According to people familiar, some VCs are withdrawing from startups that are in the midst of raising new funding rounds. Investors are also becoming nervous. Some industry players believe that India’s central bank is taking a similar approach as China in cracking down on lenders and fintechs at large. (SBI Bank, India’s government-owned bank has seen its shares rise by more than 14% in the time since the circular was issued.

“We do not believe RBI is very keen on issuing digital banking licenses, as reflected by the recent statements of the RBI Governor. The RBI has been heavily criticizing fintechs and advocating tighter regulations for the past several months. It is our view that the message is clear that fintechs will increasingly be regulated more,” wrote Macquarie.

“RBI’s payments vision 2025 document also talks about looking at the various charges for payments made in India in such a way that it further encourages digital adoption, which we believe means there is a possibility that various payment charges can come down to encourage more adoption. It is clear to us that the risks are increasing for the fintech sector, for which regulations have been a light-touch so far.”

Entrepreneurs are trying to get their concerns to RBI. At least three entities, including Digital Lenders Association of India and Payments Council of India [PCI], are currently writing letters at the RBI and various ministries to express their concerns.

A Zoom call on Thursday saw dozens fintech officials discuss common ground regarding what they should inform RBI. Some of their pressing requests include extending the timeline for the new rule by six months and establishing to the central bank that fintech industry at large is “responsible and trying to do the right thing,” according to people who attended the call.

The fintechs will also be able to provide detailed explanations of their business models and argue why those who operate with full knowledge-your-customer mandates should continue to be allowed to do so.

However, large disruptions can be expected until there is clarity or some sort of change. Tiger Global-backed Jupiter and Azim Premji’s PremjiInvest-backed KreditBee have already temporarily stopped customers from making any transactions on their prepaid cards.