How Reserve Bank's New Guidelines Will Impact 'Buy Now, Pay Later' Model | EXPLAINED

RBI last week issued a notification to fintech firms or non-banking institutions forbidding them from the service of the ‘buy now, pay later’ service

The RBI said the BNPL model needs to be examined and guidelines need to be framed for the new scheme in the lending domain.

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The Buy Now, Pay Later (BNPL) sector in India that has grown manifold has caught the Reserve Bank of India’s (RBI’s) attention.

The central bank on June 20, 2022, issued a notification to fintech firms or non-banking institutions forbidding them from the service of the ‘buy now, pay later’ service. The new RBI guidelines stated that nonbanks can no longer load prepaid instruments — digital wallets, or stored-value cards — using credit lines. The RBI said that the only valid options for a buyer are to prefill their wallet with cash, or to debit their bank or credit-card accounts.

The RBI statement said, “The prepaid payment instrument (PPI)-MD does not permit loading of PPIs from credit lines. Such practice, if allowed, 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.”

According to media reports, a few BNPL companies fear that the move by the RBI could be the death knell for them.

In its statement the central bank has further said that the BNPL model needs to be examined and guidelines need to be framed for the new scheme in the lending domain.

What is 'buy now, pay later' model?

Buy now, pay later, which is also called BNPL, is a payment option where a buyer can make purchase without paying from his own pocket. In this model, the buyer will collaborate with a firm which makes the payment. Once the payment is done, the buyer has to repay the amount to the lender through instalments in a stipulated time. Initially no interest is levied under the BNPL model. However, if a buyer fails to repay the amount on time, then the BNPL firm can charge interest on the principal amount.

How it works?

• BNPL service providers share the same operational model with terms and conditions being the only differentiator. Here’s how it operates:
• Make a purchase at a participating retailer
• Opt for the Buy now, pay later option
• Make a small down payment of the overall purchase amount
• The remaining amount shall be deducted in a series of interest-free EMIs

BNPL companies in India

Some of the BNPL firms operating in the country are in the following:

• ZestMoney
• LazyPay
• Simpl
• Amazon Pay Later
• Ola Money Postpaid
• Paytm Postpaid
• Flexmoney
• EPayLater
• Capital Float

Glitch

BNPL has some serious issues which has raised regulator's eyebrows. Various reports suggested that the BNPL service providers do not follow strict KYC check on customers applying for loan. Furthermore, the BNPL apps are reportedly not good with credit reporting also. So, the RBI released the notification cautioning users on BNPL model.

News agency Bloomberg recently reported that the banking regulator doesn’t have a problem with 90-second credit. The RBI was even willing to let nonbank finance companies, or NBFCs, retain their existing lead over banks in the origination of short-term consumer credit, especially for really small-ticket transactions. After all, shadow banking in India is no longer the shrouded creature it was a few years ago. NBFCs now face fairly stringent capital requirements, and have to make detailed disclosures of the risks on their books. However, the opportunism coded into their DNA makes them inherently risk-seeking; fintech players can still seduce them into what an RBI working group described last year as the “Rent-an-NBFC model” of digital lending.

According to experts, BNPL products are targeted to those buyers who do not have credit cards. A report released by financial technology company FIS said that BNPL is India’s fastest-growing online payment method. It is projected to rise to 8.6 per cent of e-commerce market value by 2025, up from just 3 per cent in 2021, a report in The New Indian Express mentioned.