Abstract- A mention of prepaid payment instruments (‘PPIs') invariably reminds us of an e-wallet. This is because a PPI is typically understood to mean an instrument which allows its holder to store value (read, cash) and utilise such value which is ‘stored' at a later date. The PPI is not intended to enable credit facility. FinTechs may have made this possible. Let us take a closer look.

Legal framework

The Reserve Bank of India (‘RBI') has further to Section 18 read with Section 10(2) of the Payment and Settlement Systems Act, 2007 issued The Master Directions on Prepaid Payment Instruments (‘MD-PPIs' or ‘MD') dated August 27, 2021, govern the issuance of PPIs in India. The relevant provisions of the MD-PPIs are as follows:

  1. Paragraph 2.8 of the MD-PPIs defines Prepaid Payment Instruments as below:

Instruments that facilitate purchase of goods and services, financial services, remittance facilities, etc., against the value stored therein. PPIs that require RBI approval / authorisation prior to issuance are classified under two types viz. (i) Small PPIs, and (ii) Full-KYC PPIs.

Small PPIs: Issued by banks and non-banks after obtaining minimum details of the PPI holder. They shall be used only for purchase of goods and services. Funds transfer or cash withdrawal from such PPIs shall not be permitted. Small PPIs can be used at a group of clearly identified merchant locations / establishments which have a specific contract with the issuer (or contract through a payment aggregator / payment gateway) to accept the PPIs as payment instruments. The features of these instruments are explained in paragraph 9.1 of this MD.

Full-KYC PPIs: Issued by banks and non-banks after completing Know Your Customer (KYC) of the PPI holder. These PPIs shall be used for purchase of goods and services, funds transfer or cash withdrawal. The features of these instruments are explained in paragraph 9.2 of this MD.

  1. Paragraph 15.3 (k) of the MD-PPIs requires the PPI issuer to put in place suitable cooling period for funds transfer and cash withdrawal upon opening the PPI or loading / reloading of funds into the PPI or after adding a beneficiary so as to mitigate the fraudulent use of PPIs.

Evolving Use of PPIs

The MD-PPIs as they stand, intend to provide a framework for authorisation, regulation and supervision of entities issuing and operating PPIs in India.

The FinTechs have enabled a seamless way to use PPIs to provide on-demand credit facility to Users who otherwise may not have had access to credit cards. This is made possible by sanctioning a credit limit which is ‘loaded' into PPI in real-time basis as and when used by the User.  

Such use of PPI would, strictly speaking, fall within the meaning of ‘PPI' as given under the MD-PPIs as the value is ‘stored' before it is spent by the User at a merchant. However, since the ‘loading' is done real time just before the money is transferred to the Merchant's Bank Account, the fulfilment of the ‘cooling period' envisaged under Paragraph 15.3(k) of the MD-PPIs is debatable.

Yet another example where Fintech may have disrupted the market!

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