New RBI Circular Creates Panic In The 'Buy Now Pay Later' Sector

An RBI letter asking "All Non-Bank Pre-Paid Instruments (PPI) Issuers" to cease issuing cards has led to the 'buy now pay later' (BNPL) sector expressing concerns.

The BNPL sector: Participants in the sector include companies that provide PPIs to customers with little creditworthiness, like students and young professionals.

• The companies also offer the functionalities of credit cards without the cumbersome documentation, lower fees on late payments, and flexible payment structures, thus making them an attractive option.

• According to a Razorpay report, the sector grew by an astonishing 539 per cent in 2020 and 637 per cent in 2021.

Regulatory mechanism: In a strictly regulated financial sector that's emerging from the throes of a pandemic, banks were/are sceptical of lending to high-risk customers. So, BNPL players turned to NBFCs (non-banking financial companies).

• NBFCs and BNPL players partnered to reach out to customers who struggled with securing credit.

• This partnership became so successful that, according to reports, banks combined would issue around 15 lakh cards a month against the 20 lakh cards issued by BNPL players combined.

• The RBI has already been watchful of the NBFC's activities, particularly since the IL&FS crisis, described as 'India's Lehman moment'.

What prompted the RBI move: There has been a lot of speculation over the rationale behind the RBI's decision and they largely point towards shady business practices.

• Risky lending: Since it was quite easy for sub-prime borrowers to access these credit instruments, it increased the risks faced by lenders. Some apps even allowed borrowing without submitting documents, which was dangerous.

• Rising defaults: According to Trans-Union CIBIL data, for loans that are 60 days past due date, non-BNPL loans show delinquencies of around 10 per cent, while BNPL loans show delinquencies of 18.69 per cent, which is almost double the non-BNPL rate.

• Non-disclosure of information: Some BNPLs lent without making proper disclosures to credit bureaus about the loans and repayments made by users.

• Exorbitant rates: They managed to charge very high fees to customers in case of late payments.

• Shady means of recovery: Several apps ask for permissions to contacts in case one wishes to borrow from them. However, in case of delayed payments, the users' relatives and friends are called up and informed about the payment default. Then, the BNPL platform's recovery agents ask these contacts to pay up on defaulters' behalf.

Crisis in the BNPL sector: For many fin-tech startups, BNPL products were the last option that could potentially save them in the absence of other profitable businesses.

• Mobikwik, Paytm, Slice, Uni, LazyPay, OneCard, and several other prominent startups heavily depended on the BNPL business for earning a revenue.

• BNPL players argue that such sudden regulations can cause confusion and panic within an industry that has been attempting to drive greater financial inclusion in India.

• They even see it as a move that allows banks to gain an edge in the credit card business while fin-tech players are forced to shut down due to regulatory pressure.

All eyes are on the RBI as a detailed clarification is awaited. The BNPL sector has certainly advanced financial inclusion in India, but has made several legal contraventions to get there. Since this matter involves the risk of hurting a growing economy, the RBI is being cautious in making any new moves.