FAQs and a crackdown on Digital Lending, RBI's scrutiny of co-branding partnerships, UPI goes international and more...

17th March 2023

Welcome back to MoneyRules, Setu’s newsletter on fintech regulatory developments in India, written by Sriya Sridhar, Madhuri, Drishti Ranjan, and Vinay Kesari. 

The last month has had a lot of action in the fintech regulatory space, so let’s dive in!

FAQs Issued on Digital Lending Guidelines

The RBI had issued the Digital Lending Guidelines (the Guidelines) in September 2022 and recently provided some clarifications via FAQs, for digital lending activities conducted by all regulated entities (REs) operating in India. 

Key takeaways from the clarifications include:

• Payment Aggregator (PA) services are not covered under the guidelines. This resolves a major question around the use of PAs as part of standard loan repayment and disbursement flows. However, any PA performing the role of an Lending Service Providers (LSPs) must comply with the Guidelines. This comes as a welcome clarification, with the industry long seeking to clarify the impact of the Guidelines on collection of loan repayments through PAs. 

• Lending transactions will be considered as digital lending even if some physical interface with customers is present, as long as the majority of the loan process is conducted digitally. While some Although the definition continues to remain a bit of a grey area remains, the RBI has directed REs to ensure that the intent behind the guidelines is followed.

• In the case of delinquent digital loans, REs can deploy a physical interface to recover loans in cash, where absolutely necessary. These transactions are exempted from the requirement of direct repayment of the loan in the RE's bank account, but any recovery by cash should be duly reflected in the borrower's account. 

• The REs are hence required to ensure that any fees, charges, etc., payable to LSPs are paid directly by them and not charged by LSPs to the borrower.

• The FAQs also clarify that the Guidelines issued by the RBI apply to various types of loans, including corporate and MSME loans, as well as debit card EMIs. They also cover mobile banking apps/websites of banks.

News coverage we liked on this topic: This MediaNama article containing a summary of the FAQs.

RBI's Scrutiny of Bank-Fintech Partnerships: The case of Federal Bank and OneCard

In 2022, the RBI introduced tighter regulations around digital lending and issuance of credit cards, which included limiting credit flow through prepaid and co-branded credit cards. The RBI is now focusing on bank-fintech partnerships which have contributed to the sector's growth in recent years. Federal Bank's partnership with OneCard aimed to acquire 'new-to-bank' credit customers, resulting in a 5,000x increase in card issuance and a 167x increase in average spend. However, as part of a routine audit, the RBI has sent additional queries regarding the operation of the partnership and data sharing between the two entities. These queries are significant due to the RBI's recent directions on co-branded cards, including restrictions on co-branding partners' access to customer spending data. The extra scrutiny could impact bank-fintech partnerships, which offer useful transaction data for fintechs. This also signals that the RBI is looking  to regulate the flow of customer data to unregulated entities. The RBI's actions against SBM India, a subsidiary of the State Bank of Mauritius, is another example of recent scrutiny on bank-fintech partnerships (You can read about this in our previous issue!). 

News coverage we liked on this topic: This explainer on The CapTable (Paywalled)

Crackdown on Lending Apps

On February 15th, the Indian government banned 94 lending apps and 134 betting apps under Section 69 of the Information Technology Act, 2000, reportedly motivated by concerns over the past and current presence of Chinese investors on the cap tables of some lending apps in India, and the predatory nature of certain lending apps in offering credit to users without notifying them of high penalties and interest rates in the event of default. Subsequently, MeitY asked companies to show compliance reports and eventually lifted the ban on seven high-profile lending apps, including LazyPay, Kissht, KreditBee, and Indiabulls' Home Loans, mPokket, Buddy Loan, and Faircent. 

The  RBI was not included in this move in terms of deciding to ban the apps- its role  was limited to sharing a list of apps used by RBI-regulated entities with MeitY which were not operated by REs. Some apps promise to lend by sending mobile messages, even though they are not appointed by any NBFCs, and are illegal. Based on the list provided by the RBI, the government has taken steps to address these issues. 

Following this, the RBI is set to create a 'whitelist' of legal digital lending apps, and MeitY will ensure only these apps are available on app stores. The move comes after illegal loan apps were discovered that offered micro credit to the pandemic-hit users and low-income groups at exorbitant interest rates, with hidden and processing charges and used predatory recovery practices. Potential measures include monitoring "mule/rented" accounts used for money laundering, and reviewing or cancelling dormant NBFCs to avoid their misuse. Additionally, all government ministries and agencies have been asked to take steps to prevent illegal loan apps from operating. 

News coverage we liked on this topic: This coverage on The Morning Context, analysing the crackdown and future implications for players in digital lending. (Paywalled)

RBI extends full-KYC PPIs to foreign nationals and NRIs visiting India

On February 10th, the RBI made a change to the regulations around Prepaid Payment Instruments (PPIs) by allowing banks and non-banks to issue full-KYC PPIs denominated in INR to foreign nationals and NRIs visiting India. The new facility will initially be available to travellers from G-20 countries arriving at select international airports. Under the new guidelines, PPIs issued to foreign nationals and NRIs will require physical verification of passports and visas during issuance, with the issuer maintaining the information and records. The PPIs can only be used for merchant payments (P2M) and can be issued in the form of wallets linked to UP (Unified Payments Interface). The guidelines also include other requirements such as FEMA  compliance and restrictions on PPI limits. 

This move will allow NRIs to engage in UPI transactions effortlessly without the requirement for Indian mobile numbers (you can read more about this in our previous issue as well). With UPI's continuous growth and adoption by international users, the focus on making UPI a ubiquitous payment solution is anticipated to remain a top priority for both NPCI and UPI platforms. Read about Pine Labs’ partnership with Thomas Cook to issue PPIs to foreign nationals, here. 

News coverage we liked on the topic: This explainer in The Economic Times.

Highlights of RBI Statement on Developmental and Regulatory policies

The RBI’s latest statement outlining its developmental and regulatory policies includes some interesting updates:

1. Pilot Project of a QR code-based Coin Vending Machine (QCVM): The QCVM is a cashless coin dispensing machine that will allow customers to receive coins by debiting their bank account through UPI. The pilot project is set to be launched at 19 locations across 12 cities in India, and the vending machines are planned to be installed in public places such as railway stations, shopping malls, and marketplaces to enhance ease and accessibility.

2. Penalties for loans: The existing guidelines allow Regulated Entities (REs) to impose penal interest on loans to encourage credit discipline. However, the practice has led to divergent practices among REs and excessive charges in some cases, resulting in customer complaints. To address this, the regulatory guidelines have been reviewed, and it has been decided that penalties for delays or other breaches should be imposed as "penal charges" in a reasonable and transparent manner, rather than added as "penal interest" to the interest rate. The penal charges shouldn’t be capitalised, and REs can adjust the credit risk premium in case of a deterioration in the borrower's credit risk profile. Draft guidelines reflecting these changes will soon be available for feedback.

Highlights of the Union Budget 2023

On February 1st, the Union Budget was presented for the financial year 2023-24. Here are some highlights which stood out as relevant from a regulatory perspective:

• Establishment of a National Financial Information Registry: The government, in consultation with the RBI, will establish a National Financial Information Registry that will serve as a central repository of financial and ancillary information. The registry is expected to facilitate the flow of credit and promote financial inclusion. The registry is expected to be similar (paywalled) to the Public Credit Registry (PCR) proposed by the RBI in 2018, which was meant to be a comprehensive database of all credit information accessible to all types of lenders. 

• Regulations for Non-Personal Data: A National Data Governance Policy is proposed to enable access to anonymised data, which could have wide ranging effects to anonymised financial information by fintechs and finserv entities. This is particularly relevant given that the latest draft Data Protection Bill omits non-personal data from its scope. (See our previous coverage on the Data Protection Bill here.)

• KYC Simplification: Rather than a one size fits all approach, an approach tailored to the risk profile of a particular customer will be encouraged, which could allow for cost savings and quicker onboardings. Additionally, there are proposals to allow ID and address updates through DigiLocker, and for all government agencies to use PAN as a single common business identifier rather than the current fragmented approach. 

• Scope of DigiLocker expanded: Scope of documents for individuals and non-individual entities (e.g. small businesses) is expected to be expanded. An entity-level Digilocker will be implemented for usage by MSMEs, large businesses, and charitable trusts to securely store and share important documents online with various entities including regulators, banks, and authorities (check out Setu’s KYC product here!)

News coverage we liked on this topic: For a more macro perspective on financial inclusion, you can read D91 Labs’ coverage on the budget here. This article in The CapTable (paywalled)  articulates the concerns of the fintech industry regarding gaps that the budget failed to address, and this article in The Print dives deeper into simplifying the KYC process using technology.

• Stories from D91: Check out D91’s latest blog in the 'Banking on Women' Series, an initiative to understand and design for the financial lives of women in India. The blog explores women’s tenuous relationship with credit and the factors that affect their borrowing decisions. Also out, as part of the 'Digital Payments for the Next Half Billion' Series, D91's  fourth blog exploring the case for 'credit' on UPI in driving financial inclusion in India. Finally, you can read our summary of the Budget 2023-24 announcements with implications for financial inclusion.

• RBI publishes status of applications from payment aggregators: The RBI recently released the status of applications received from online payment aggregators (PAs) under the Payment and Settlement Systems Act, 2007 as of February 15th. Out of the total number of applicants, 32 existing PAs and 19 new PAs have been granted in-principle approval, 18 existing PAs and 9 new PAs are under review, and the applications of 4 existing PAs were returned. The list also includes 17 existing PAs and 40 new PAs whose applications were returned or withdrawn, with an instruction to cease online PA activities and close their accounts within 180 days.

• UPI goes international: India's UPI and Singapore's PayNow have been officially connected, allowing for real-time payment linkage. This marks the first cross-border Person to Person (P2P) payment facilities to be launched with Singapore, making it easier for the Indian diaspora, especially migrant workers and students, to transfer money instantaneously and at a lower cost from Singapore to India and vice versa. While UPI payments through QR codes are already in place in Singapore, it was only limited to a few outlets, making this move a significant expansion.

• UPI at the G20 Summit: The RBI launched 'UPI One World', a digital payment system for foreign nationals visiting India. It will allow users to load money via international currency/cards and pay seamlessly at any QR code in India using an interoperable UPI 2.0 rails. UPI One World will initially  be offered by ICICI Bank, IDFC First Bank and three non-bank PPI issuers: Pine Labs ,Transcorp International, Ebix Cash. 

• UPI LITE Launched: Paytm Payments Bank Limited (PPBL) has become the first payments bank to launch UPI LITE, a feature that enables quick and real-time transactions for multiple small value UPI transactions, with a limit of INR 200 per transaction and INR 4,000 daily. For interested readers, here’s an interesting article by D91 Labs on UPI LITE's potential to solve for small-value transactions.

This wraps up the updates which caught our eye in February ‘23! Feel free to DM us on Twitter or LinkedIn, or fill out this form with feedback or topics to include in our March edition.