Informist, Tuesday, Apr 26, 2022

By T. Bijoy Idicheriah and Alekh Archana

MUMBAI - Non-bank lenders and finance technology players currently in the business of credit cards will have to take fresh approval from the Reserve Bank of India to continue with these business operations, a banking industry source told Informist.

The central bank is looking to tighten norms for credit cards business, given the worries around data sharing and customer consent.

"The need to highlight the approval aspect was felt after the RBI received complaints about practices followed by such non-banking finance companies and some unregulated fintechs that have tied up with banks," the source said.

A transition period may eventually be specified through operational guidelines for non-bank lenders to apply and get approval for this activity. And in case the RBI finds that the entity is not fit to run credit card operations, it may be given time to wind down this line of business.

On Apr 21, the RBI issued a master circular on issuance and conduct of credit and debit card operations. Applicable to all banks, excluding payments and some cooperative banks, and non-banking finance companies, the circular will come into effect from Jul 1.

According to the circular, NBFCs cannot issue credit or debit cards, physically or even virtually, without the central bank's approval. Those interested will need a certificate of registration, apart from specific permission to enter into the credit card business. They will also need minimum net owned funds of 1 bln rupees.

The master circular issued in 2015 had not clearly spelled out regulations for NBFCs, which left the door open for such lenders to issue co-branded credit cards with commercial banks.

The RBI's directive came at a time when there has been a surfeit of card issuances by NBFCs and fintechs in recent times, which has been done in partnership with banks.

As the earlier norms only specifically allowed banks and designated card companies to issue credit cards, non-bank lenders and fintechs chose to partner with banks to get access to the payments system that is the bulwark of the cards business. 

"For banks, the partnership provides them the opportunity to grow unsecured credit card business as well as earn fee through rent seeking simply because they have the bank licence. For fintechs, many of whom are largely unregulated, the partnership with banks gives them access to credit card business. But there are serious concerns on how data sharing works in such cases and partnerships," the source said.

In some cases, involving online food delivery platforms, it was found that the issuing entity was sharing customer data in violation of the RBI norms.

In the case of at least one such private bank that heavily relies on non-bank credit card partnerships for its business, the RBI is likely to seek details on its heavy reliance on unsecured business as part of the total lending book, which is good for margins but detrimental from a risk management perspective.

"There are also concerns over new industry practices that have emerged where such card dues are turned into term loans without express consent from the customer during transition. Banks tend to rely on the broad initial consent and fine print to provide such a loan that the customer may not actually want," the source said.

In a report on Monday, ICICI Securities said that banks partnering with new-age credit card companies will have to exercise tighter control on the customers of these companies to comply with the central bank's latest directions.

"The governance framework for card issuance, underwriting standards, closure, interest rates and other charges and customer conduct could also necessitate more control of partner banks on the customers of some of the new-age credit card companies," the report said.   End 

Edited by Ashish Shirke

Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist, Tuesday, Apr 26, 2022

By T. Bijoy Idicheriah and Alekh Archana

MUMBAI - Non-bank lenders and finance technology players currently in the business of credit cards will have to take fresh approval from the Reserve Bank of India to continue with these business operations, a banking industry source told Informist.

The central bank is looking to tighten norms for credit cards business, given the worries around data sharing and customer consent.

"The need to highlight the approval aspect was felt after the RBI received complaints about practices followed by such non-banking finance companies and some unregulated fintechs that have tied up with banks," the source said.

A transition period may eventually be specified through operational guidelines for non-bank lenders to apply and get approval for this activity. And in case the RBI finds that the entity is not fit to run credit card operations, it may be given time to wind down this line of business.

On Apr 21, the RBI issued a master circular on issuance and conduct of credit and debit card operations. Applicable to all banks, excluding payments and some cooperative banks, and non-banking finance companies, the circular will come into effect from Jul 1.

According to the circular, NBFCs cannot issue credit or debit cards, physically or even virtually, without the central bank's approval. Those interested will need a certificate of registration, apart from specific permission to enter into the credit card business. They will also need minimum net owned funds of 1 bln rupees.

The master circular issued in 2015 had not clearly spelled out regulations for NBFCs, which left the door open for such lenders to issue co-branded credit cards with commercial banks.

The RBI's directive came at a time when there has been a surfeit of card issuances by NBFCs and fintechs in recent times, which has been done in partnership with banks.

As the earlier norms only specifically allowed banks and designated card companies to issue credit cards, non-bank lenders and fintechs chose to partner with banks to get access to the payments system that is the bulwark of the cards business. 

"For banks, the partnership provides them the opportunity to grow unsecured credit card business as well as earn fee through rent seeking simply because they have the bank licence. For fintechs, many of whom are largely unregulated, the partnership with banks gives them access to credit card business. But there are serious concerns on how data sharing works in such cases and partnerships," the source said.

In some cases, involving online food delivery platforms, it was found that the issuing entity was sharing customer data in violation of the RBI norms.

In the case of at least one such private bank that heavily relies on non-bank credit card partnerships for its business, the RBI is likely to seek details on its heavy reliance on unsecured business as part of the total lending book, which is good for margins but detrimental from a risk management perspective.

"There are also concerns over new industry practices that have emerged where such card dues are turned into term loans without express consent from the customer during transition. Banks tend to rely on the broad initial consent and fine print to provide such a loan that the customer may not actually want," the source said.

In a report on Monday, ICICI Securities said that banks partnering with new-age credit card companies will have to exercise tighter control on the customers of these companies to comply with the central bank's latest directions.

"The governance framework for card issuance, underwriting standards, closure, interest rates and other charges and customer conduct could also necessitate more control of partner banks on the customers of some of the new-age credit card companies," the report said.   End 

Edited by Ashish Shirke

Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.