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Prepaid Instruments – AKIN to credit facility?

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Prepaid Instruments – AKIN to credit facility?

Date | Version June 17, 2022 | 1.0
Keywords PPI, Credit Facility
List of Legislation(s) Referred RBI Master Directions on Prepaid Payment Instruments (PPIs) dated August 27, 2021
Jurisdiction India

Abstract

A mention of Prepaid Payment Instruments (PPIs) invariably reminds us of e-wallets. Traditionally, a PPI allows its holder to store value and utilise such stored funds at a later date. PPIs were not originally intended to function as credit instruments. However, developments in the FinTech sector have significantly altered their practical usage.

Legal Framework

The Reserve Bank of India (RBI), under the Payment and Settlement Systems Act, 2007, issued the Master Directions on Prepaid Payment Instruments (MD-PPIs) dated August 27, 2021, governing the issuance and operation of PPIs in India.

The Master Directions classify PPIs into Small PPIs and Full-KYC PPIs. These instruments facilitate the purchase of goods and services, financial services, remittance facilities and other transactions against the value stored therein.

Evolving Use of PPIs

The FinTech industry has introduced innovative models that use PPIs to provide on-demand credit facilities to users who may not otherwise have access to conventional credit products such as credit cards.

This is achieved by sanctioning a credit limit that is loaded into a PPI on a real-time basis whenever a user initiates a transaction. Although such arrangements technically satisfy the requirement of value being stored before expenditure, they raise important regulatory questions regarding compliance with cooling-period requirements prescribed under the Master Directions.

The article examines how technological innovation is reshaping the use of PPIs and explores the regulatory implications of integrating credit facilities with prepaid payment instruments under the existing RBI framework.

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