Over the past few years, the Buy Now Pay Later (BNPL) market in India has expanded quickly to the point where a few observers have begun speculating about the demise of credit cards. However, in a turn of events, the RBI’s new circular may have a massive impact on the industry’s future in the country.
The industry expanded by 539% in 2020 and by 637% in 2021, according to a Razorpay report. Some of these players have targeted students and young professionals unfamiliar with credit as their target market.
These players could carve out a niche in the market by offering credit to customers that banks and other big players wouldn’t touch. Additionally, they offered the same features as credit cards without the troublesome paperwork, lower late payment penalties, flexible payment plans, and a variety of offers.
Numerous articles about the demise of credit cards were published as the BNPL industry expanded. However, in a turn of events, the RBI’s new circular may have sounded the death knell for the BNPL sector.
It’s critical to comprehend how these businesses operate to comprehend why BNPL companies ended up in a pickle.
Because only banks are permitted to issue cards, these businesses teamed up with banks to issue the cards in the bank’s name. However, as was already mentioned, these businesses catered to markets that banks wouldn’t touch with a 10-foot pole.
These players soon turned to non-banking financial institutions (NBFCs) that would lend to their accounts because they primarily catered to high-risk clients. As a result, the BNPL participants could work around Reserve Bank of India restrictions and connect with clients who had trouble getting credit.
In terms of the number of cards issued, these businesses outperformed banks. In comparison to the combined 20 lakh cards issued by the BNPL players, banks are said to issue only about 15 lakh cards each month.
Although there has been much speculation regarding the RBI’s decision’s justification, the RBI has not yet provided a thorough explanation.
Some people think non-bank pre-paid instruments (PPIs) won’t be able to be loaded with credit any longer. Still, others think this is just a way to close the regulatory gap between fintech companies and banks, where fintech have more latitude.
Products like digital wallets or cards that could have a credit limit loaded onto them, making them essentially the same as credit cards, are examples of pre-paid instruments. They are also referred to as credit-card challengers.
The regulators are alleged to have taken notice of these companies’ rule-breaking and other shady business practices. In a recent letter, the RBI urged “All Non-Bank Pre-Paid Instruments Issuers” to stop issuing cards.
“The PPI-MD does not permit loading of PPIs from credit lines. Such practice, if followed, should be stopped immediately. Any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007,” said the clarification by the RBI.
Easy KYC procedures, little paperwork, quick approval, and no requirement for credit history contributed to the BNPL players’ ability to expand fairly quickly; however, these same factors may have led to increased RBI scrutiny. The ease with which subprime borrowers could obtain these credit instruments also increased the risks that the lenders had to deal with.
Some apps even permitted borrowing without submitting any supporting documentation, which was a risky lending practice. According to Trans-Union CIBIL data, non-BNPL loans have defaults of about 10% for loans that are 60 days past due, whereas BNPL loans have defaults of 18.69%, which is near twice the non-BNPL rate.
Despite a generally strong economy and high savings rates, these delinquency rates are quite high, making it harder if the economy weakens.
Others would make loans without properly informing credit bureaus about the loans and the repayments that users had made. Additionally, they could charge customers excessive late payment fees not controlled by the RBI.
In addition to breaking laws, lending to subprime borrowers, and disobeying the law, some fintech companies have also come under fire for using dubious methods to recover money. For instance, several apps request contacts’ permissions if we want to borrow something from them.
Users permit these apps to access their contact list without their knowledge. The reviews, however, reveal the true rationale for these permissions. Reviews of well-known apps have highlighted that in cases of late payments, users’ family members and friends are contacted and informed of the default. Then, the recovery representatives of the BNPL platform ask these contacts to make the payment on the defaulter’s behalf.
The new circular is still confusing the BNPL sector and poses a threat to their very survival.
The significance, applicability, and impact, of the new regulations, have been hotly contested. The entire business model would be destroyed if fintech could not issue PPIs loaded with credit and lending.
The only option left for many fintech start-ups that might have been able to survive was BNPL products. Once all other avenues for generating revenue failed, many fintech companies turned to BNPL.
For instance, several well-known start-ups heavily relied on the BNPL business to increase their revenues, including Mobikwik, Paytm, Slice, Uni, LazyPay, OneCard, and others. They had so far been unable to find a better source of income due to the lack of neo-banking regulations.
The participants in BNPL contend that such abrupt regulations may result in confusion and panic in a sector that has been working to promote greater financial inclusion in India.
In their eyes, it even gives banks an advantage in the credit card market, while fintech companies are forced to close their doors due to regulatory pressure.