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RBI Notification Restricting Non-Banking Organizations To Issue Credit Lines

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Functions of the Reserve Bank of India 

As we all know that Reserve bank of India (RBI) is the supreme financial institution in India. The RBI is in charge of several tasks, including carrying out monetary policy and releasing the money. India's gross domestic product (GDP) growth rates have been among the best in the world. It is also recognized as one of the BRIC countries—Brazil, Russia, India, and China—which combined make up the top four developing market nations. The bank had $5.93 billion in assets and its headquarters are in Mumbai, India's financial hub. Working as a regulator and supervisor of the financial system is one of the RBI's most crucial responsibilities. Commercial banks, regional rural banks, local area banks, cooperative banks, financial institutions, including development financial institutions (DFIs), and non-banking financial companies are all part of India's financial system.

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The Banking Regulation Act of 1949's provisions gives RBI the authority to oversee the Indian banking system. The RBI legislation of 1934 gives it authority over other entities. The goals of this role are to safeguard depositor interests and uphold the stability of the nation's banking and financial system.

The new bank business model is being closely examined by the RBI. Where Fintech connects to a network of traditional banks and becomes a provider of financial services to customers. The worry is that the digital model firm could expand quickly and surpass the underlying bank in terms of customer base. The only channel open to these users is the fintech-owned digital platform, despite the fact that neobank customers continue to be account holders of the underlying banks in terms of customers. 

Read Our Blog: Financial Institutions and Technology in India

RBI new notification On PPI (prepaid payment instruments)

Recently, the reserve bank of India issued a notification about prepaid payment in which they said that the reserve of India would not allow any non-bank prepaid wallet and prepaid cards to give any credit lines to their customers. This notification is really important for all the fintech-driven credit cards and Buy-now-pay-later wallets. Because this notification can push these fintech-driven companies to a certain backfoot and may create a disadvantage for them. The banking authority has made it clear that loading PPIs from credit lines, a technique used by some fintech credit card businesses, is prohibited by its master directive on prepaid payment instruments (PPIs). Credit lines are often offered into these businesses' prepaid wallets through partnerships with banks or NBFCs. "If this behaviour is continued, it ought to end right away. The Payment and Settlement Systems Act of 2007 contains measures that may result in penalties for non-compliance in this regard, the RBI observed.

What Is the Meaning of Prepaid Payment Instrument (PPI)?

Prepaid payment systems enable the purchase of goods and services using the value that has been stored on the instrument. The value kept on these instruments is the amount that the owner has paid for them with cash, a debit from a bank account, or a credit card. Prepaid payment instruments (PPIs) are defined by the RBI as payment methods that make it easier to purchase goods and services, as well as to transfer money and use financial services and remittances, in exchange for the value that is held on or inside the instrument. PPIs come in the form of vouchers, magnetic chips, smart cards, mobile wallets, and payment wallets. Banks and NBFCs are permitted to issue PPIs under the regulations.

What is The Meaning of Credit Line in RBI Notification?

A traditional loan is not the same as a line of credit. With the latter, you request a certain amount of money and repay it over the specified period of time in instalments. You cannot keep borrowing additional funds against the same debt. A credit line is a predetermined borrowing cap that gives a person or business access to credit whenever they need it. The customer can access it as long as the offered limit is not exceeded. Compared to a lump-sum loan, where a fixed amount is borrowed, it is similar to a flexible loan. However, when you ask for a credit line, you are requesting regular access to money for when you need it. It's generally accepted that you may withdraw money on many occasions. These loans can be dangerous, but they frequently allow you to finish tasks or conduct business when you lack the essential funds. You assume you'll be able to fulfil your duty later whenever you take on debt and put off paying it back.

Difference Between Loan and Line of Credit

Customers might benefit from loans and lines of credit in several ways. They are also essential for a country's economy to run smoothly. To gain a better understanding of this subject, it is vital to keep in mind that there are a number of places where a loan and a line of credit differ. We should address these differences below.

Loan Credit Line
A loan is something that is lent to another party in exchange for future repayment of the loan value plus interest. It can be money, property, or other tangible items. A line of credit is described as a type of revolving account that enables borrowers to borrow money, use it up to a predetermined limit, pay it back with interest, and then use it once again.
In general, loans are preferable for sizable, one-time purchases or investments. Loans continue to be the go-to option for financing a college education, a new home or automobile, or any other major purchase. For continuous, minor, unforeseen, or to balance income and cash flow, lines of credit are preferable.
Interest rates are fixed for loans. The interest rate on credit lines is fluctuating.
The entire loan amount is immediately subject to interest. Interest-only builds up when money is accessed.

Why has the RBI Issued this Notification?

The regulator is pushing harder than ever to impose restrictions in the interest of consumer safety as a result of the market penetration of loan products. Some fintech companies partner with NBFCs to offer these products, while others partner with banks like SBM Bank, RBL Bank, Federal Bank, etc. The NBFC partners of the fintech company may also provide credit lines in particular circumstances. Shaktikanta Das, governor of the RBI, recently stated that regulations for the digital payments industry would soon be issued. Most fintech companies today also provide credit products in addition to their core services. Postpaid wallets with minimal credit lines are offered by businesses like Paytm, Amazon Pay, LazyPay, Simpl, etc. In collaboration with banks and NBFCs, other companies like Slice, Uni, Fi, OneCard, etc. offer credit cards.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not corpseed, and have not been evaluated by corpseed for accuracy, completeness, or changes in the law.

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Author
Surbhit Sharma
I have worked for many internet blog pages and news portals. currently, I am working as a content writer for Corpseed Pvt. Ltd. I like to write blogs and articles in the field of different services.

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