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Guidelines by RBI for Non-bank buy now pay later (BNPL) companies

  • June 26, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Guidelines by RBI for Non-bank buy now pay later (BNPL) companies

Subject: Economy

Section: Monetary Policy

Context:

  • After slapping curbs on non-bank buy now pay later (BNPL) companies, the Reserve Bank of India (RBI) is likely to come out with guidelines for the BNPL segment which was using pre-paid instruments (PPIs) to extend short-term, interest-free loans to customers for online purchases.

Non-bank buy now pay later (BNPL) segment:

  • According to banking observers, the Reserve Bank is not happy with fintech companies using PPIs as a credit instrument, circumventing the regulatory oversight.
  • The banking regulator is in discussion with fintech players to find a way out and bring the segment under a regulatory framework so that PPIs are used as a payment instrument and not as a credit avenue.
  • While BNPL services have developed into a new payment mode alongside the existing payment modes like cards, UPI and net banking, it has remained outside the direct RBI regulation.
  • This channel, facilitated by a few payment aggregators, leverages the existing nodal account (escrow account after authorisation) to route payments between a BNPL customer and a merchant.
  • New norms will bring more transparency in the fintech lending space. The main purpose of a PPI licence is to act as a payment instrument and not as a credit instrument.
  • The latest regulation is probably coming from recent developments wherein newer business models of credit-based payment products were built by companies using PPI as a vehicle
  • The RBI has raised concerns on funding of these PPI instruments through a credit line from an NBFC.
  • Regulatory clarity for big tech and fintechs as well as BNPL will really help entities plan long term and invest even more in fintech in India.
  • BNPL is India’s fastest-growing online payment method with a significant impact on banks, large merchants and card schemes.
  • Due to its hassle-free on-boarding experience, extension of credit facility, low-cost structure for the customer and facilitating easy repayments, BNPL is growing popular among young income earners.
  • Some of the popular BNPL companies are LazyPay, Simpl, ZestMoney, Amazon Pay Later, Ola Money Postpaid, Paytm Postpaid, Flexmoney, Slice, UNI and EPayLater.

How does a BNPL company operate?

  • A customer who holds a BNPL card or account can make a purchase at a participating retailer and opt for the ‘Buy now, pay later’ option.
  • After the purchase, the customer can repay the BNPL firm in a series of interest-free EMIs – unlike credit cards which carry a high interest rate of 42 per cent — spread over 3 months or as a lump sum amount.
  • If it remains unpaid, interest will be charged.
  • The BNPL company will pay the merchant immediately.
  • However, for a purchase of Rs 500, instead of settling the full Rs 500, they would pay something like Rs 470 or Rs 450 and pocket the difference.
  • The merchant agrees to give a discount to the BNPL firm.
economy Guidelines by RBI for Non-bank buy now pay later (BNPL) companies
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