RBI

RBI Compliance on Wallets

The Prepaid Payment Instruments (PPIs), also known as digital wallets or e-wallets, have been widely renounced in the country within the past years. Basically, Prepaid Payment Instruments or wallets are dominantly used among individuals to procure any type of goods or service or used while transferring monetary funds from person to person, etc. Moreover, companies are using digital payment methods to accept the funds, which has somehow helped boost their business growth. The government of India is also taking several initiatives to promote and encourage the practice of digital payments among the citizens. The government is promoting several Prepaid Payment Instruments (PPI) or wallets such as Yono SBI, Paytm, Bharatpe, Phonepe, Google Pay, etc. all such wallets are widely used by both banking and non-banking institutions. Wallets are more likely to be similar to bank accounts. An individual can easily use those funds available in the wallet as comparable to the bank account. Thus, the Reserve Bank of India has formulated some guidelines related to the functioning of wallet platforms to safeguard and protect the customers’ money.

Types of Wallets

The Reserve Bank of India has categorized the wallet types on the basis of their purpose, such as closed System Prepaid Payment Instruments, Semi-Closed Prepaid Payment Instruments, and open System Prepaid Payment Instruments.

Closed System Payment Wallet

Closed system payment wallet includes Myntra, Cleartrip, and many others wallet, which is provided from the end of the company to their customers for the purpose of buying on their online platform, which such issuer company operates. Such wallets are widely used to buy goods and services or even to receive refunds, including cash back from online platforms. Such a Platform neither provides the facility to redeem or withdraw the cashback; rather,, such cash backs will be used to purchase on the same platform.

Semi-Closed Payment Wallet

Such a type of closed system wallet is widely used in order to purchase goods and services and is accepted as a payment instrument that is easily redeemable through an identified merchant who engaged with an agreement from the issuer to accept such payment instruments, etc. Semi-closed wallets are used to buy goods or services from certified merchants. Further, it can be used to purchase or is widely common in making transfers of funds from person to person, except such wallets are not applied to withdraw money from banks, etc.  Examples Such as Paytm, Phonepe, Mobikwik, Freecharge, and many others.

Open System Payment Wallet

Open System Wallet widely covers all those limitations of the closed and semi-closed payment system wallets. It can be easily used in buying goods and services along with the withdrawal of cash from any ATM booth, swiping of cards, etc. Open System Payment wallet includes Visa card, Master Card, and Rupay Card.

Definitions under Prepaid Payment Instruments

Issuer

It refers to entities issuing prepaid payment instruments or wallets to an individual or any organization. Generally, under this payment wallet, the collected or received money is retained by such entities and further transferred to the merchants who are parts of the acceptance arrangement, whether directly or any kind of settlement arrangement.

Holder

It refers to those individuals or legal entities who possess a wallet and use it further to buy any goods and services or receive refunds from others.

Prepaid Payment Instruments

Prepaid Payment Instruments or Wallets are those payment instruments that enable the service to purchase any goods or services against the fund or value stored within the instruments. Such value stored in the instruments represents the value paid by the holder by cash, credit, or debit through a bank account. The prepaid instruments can be issued in the form of smart cards, magnetic stripe cards, internet accounts, and many other forms.

PPIs are further classified into two types- Small PPIs and Full-KYC PPIs. Generally, Small PPIs are issued on the basis of minimum information of the holder of such PPIs from the end of the bank and non-banks. Usually, small PPIs are used to purchase goods and services, while transferring funds and withdrawing cash are barred under small PPIs.

Further, Full-KYC PPIs are also being issued by non-banks and banks after completing the process of KYC (Know Your Customer) from those entities of such PPI holders.

Mobile Prepaid Instruments

It represents the talk time value provided by the end of the service provider and can be further used to buy any value-added service either from the mobile service provider or any third party.

Merchant

Merchants under the Prepaid Payment Instruments refers to those establishments having some kind of agreement engaged either to accept PPIs of the issuer against the purchase and sale of any kind of goods and services, etc.

Eligibility requirements for issuance of PPIs by banks

Under this Master direction of the RBI, the banks who want to comply with the issuance of PPIs/ Prepaid Payment Instruments or wallets, along with those entities who the regulatory department of the RBI indirectly regulates, will be further allowed with permission, if the RBI finds fit and proper to grant approval for banks to issue PPIs.

Non-banks who are applying under the Payment and Settlement Act, 2008 must make an application before the Department of Payment and Settlement Systems (DPSS) after getting approval from the end regulatory department; such banks are required to submit before the central office, RBI Mumbai within a period of 30 days after obtaining such NOC clearance from the regulatory department.

Capital and other eligibility requirements for issuance of PPIs by non-banks

• Under the Master Direction of RBI, it is specified that Non-banks who has fulfilled the eligibility for PPIs or wallet duly prescribed by RBI along with the other requirements of the regulatory department of RBI will be allowed to carry out the operation to issue PPIs from the approval of RBI itself. Non-banks regulated either by any other financial regulators if required permission under the Payment and Settlement Act, 2008, must make an application before the Department of Payment and Settlement Systems (DPSS) after getting approval from the end of the regulatory department, such banks are required to submit before the central office, RBI Mumbai within a period of 30 days after obtaining such NOC clearance from the regulatory department.
• Non-banking entities applying for the PPIs’ permission from the RBI must be registered under the Companies Act, 1956/2013.
• Non-banking entities, either having Foreign Direct Investment or Foreign Portfolio Investments and Foreign Institutional Investments, will be required to comply with the consolidated FDI policy issued by the Government of India in order to meet their capital requirements.
• The MOA submitted by the Non-bank entity must require the proposed activities related to PPI issuance.
• It is mandatory for all non-bank entities who are seeking permission for PPIs under the PSS Act by the RBI to hold a minimum value of asset INR 5 crores based on the records of their last audited balance sheet. A report of such an audited balance sheet is required to be submitted before the RBI during the application request for PPIs. Such certificate must be enclosed in a format (Annex-2) from the CA end so as to get approval from the RBI. Further, the application will be processed by the RBI based on the net worth, which is required to be further maintained at all times. Such entity must achieve or own,   from the date of receiving authorization till the end of the third financial year, a minimum net-worth value of 15 crores.
• Non-bank PPIs or wallet issuers are also required to comply with the minimum net worth of INR 15 crore for the financial year. The same needs to be reported before the RBI, along with a certificate in a specified format (Annex-2) and a balance sheet.
• Newly incorporated Non-bank entities are also required to comply with the same rule and submit their balance sheet along with the enclosed specified format from the end of their CA regarding their current net worth.

Authorization Process For Non-Banks

• A Non-bank entity willing to get authorization for the issuance of PPIs or wallets must apply for the authorization according to Form A (given on the official website of RBI- www.rbi.org.in) duly prescribed as per the rules of the Payment and Settlement Systems Regulation Act, 2008 in its regulation 3(2)  along with required fees.
• The RBI will examine the application of the desired applicant entities to ensure prima facie eligibility. The directors of the desired applicant entities are required to submit their declaration application with a specified format prescribed by the RBI in the enclosed format as Annex-3. In case RBI finds a dims fit and proper after examining the application as not satisfying the required eligibility, then RBI can return the application of the desirous applicant without a refund of fees.
• The RBI prior approval for granting-in-principle to the applicant may check whether the applicant entity complies with certain aspects such as customer service, technical, and other essential requirements.
• After examining the eligibility criteria, the RBI can issue an ‘in-principle’ approval, valid for 6 months from the date of approval. Within the same period, the entities are required to submit a SAR (satisfactory System Audit Report) duly made by a CA complying with the minimum net worth to the RBI. Failing to submit such an SAR report to the RBI, the in-principle approval will be lapsed automatically. In case desirous entities require an extension in filing the report, then entities must in writing seek an extension need to specify in writing to DPSS, CO, and RBI Mumbai mentioning the justified reason. Further, the RBI can allow such entities a maximum one-time extension of 6 months. The RBI also reserved the right to decline such requests made in writing.
• Based on the receipt of satisfactory SAR, net worth, and due diligence compliance reports, the RBI may provide the applicant entities with the final certificate of Authorization (COA), and the entities are now permitted to start their business operation within a period of 6 months since the date of such COA approval from the RBI. After the specified period expires, the certificate of Authorization will collapse automatically. A further extension to commence business operations depends upon the discretionary rights of RBI, which must be sought in writing from the end of failing entities. 
• Entities seeking the renewal of such authorization certificate must make their request in writing to the DPSS, CO, RBI Mumbai before the expiry date of such authorization certificate. The request must be made 3 months prior to the expiration date, and the RBI itself reserves the right to either allow or decline the renewal requests.
• In case any entities want to make any changes regarding the features of their products, process, structure, or business operation, they must inform about those complete details to the chief General Manager (CGM), DPSS, CO, RBI, Mumbai, and the RBI will respond on such changes within the next working 15 days from the date of such application.
• Entities, in case of any takeover or acquisition, are required from the end of their directors to furnish their declaration and undertaking as specified in Annex-3, and the RBI will examine the same. In case RBI, on its findings, dims fit and proper, it can easily restrict such takeovers or acquisitions.

Safeguards Against Money Laundering Provisions

A large amount of funds are involved in PPIs or wallets, and a number of huge transactions are widely carried out daily in the country. It seems to be quite a possibility that such funds might be used for different illegal transactions like money laundering, terrorism funding, etc. Thus, RBI made implementation of such safeguards in PPIs or wallet sectors-

• The RBI, in its Master Direction-‘Know Your Customer Direction, 2016’, has issued several guidelines from its regulatory department to comply with all PPIs or wallet entities in order to combat Financing of Terrorism and Anti-Money Laundering issues.
• The rules of Money Laundering under the Prevention of Money Laundering Act, 2002, along with other amended regulations, will also be applicable to both PPIs or wallets and their respective agents.
• PPIs or wallet issuers are required to maintain records of all their prior transactions duly performed using the wallets or PPIs for at least 10 years. Such maintained records must be made available for the RBI along with the other regulatory authorities for its proper checks and scrutiny purposes. The PPIs or wallets are required to file suspicious Transaction Reports (STR) for the Financial Intelligence Unit-India (FIU-IND). 

Issuance, Loading, And Reloading of PPIs

It is mandatory for every entity authorized or approved by RBI to issue PPIs or wallets, and issue reloadable or non-reloadable must comply with the directions in paragraphs 9 and 10. RBI instructed the PPIs or wallet issuers to have their own board-approved policy clearly mentioning the types of issuance and their business operations.

The PPI issuer must ensure the names of the approved companies who have received approval or authorization to issue and operate as PPIs to display its brand name during their business operations. PPI issuer will not be liable to pay any interest based on PPI balances. PPIs, as permitted from time to time, are allowed to load or reload by cash, debit, or credit to a bank account along with any other payment instruments that must be done in Indian Currency only. PPIs are more likely allowed to cash loading with a limit of INR 50,000 on a monthly basis. PPIs under this Master Direction are permitted to issue any type of instruments, such as cash, cards, or wallets, that might be used to access the PPI and the amount within the PPI. PPI is debarred from issuing any paper voucher payment instruments.

Banks and Non-banks are allowed by the RBI to load or reload PPIs from their authorized outlets only or can be further issued through the designated agents after complying with the RBI guidelines-

• Required a board-approved policy mentioned with the engaged framework of their agents,
• Complying with the due diligence of those engaged persons who may serve as their agents,
• Be liable for the acts done by the agents during the course of employment in terms of safety and security purposes,
• Make sure that the details or information of their customers are kept safely in their possession along with those agents’ possession,
• They are required to monitor their agents at least once a year, along with ensuring the applicability of the other applicable laws with KYC/AML/CFT norms.

PPIs Under Co-Branding Arrangements

• Co-branding arrangement will be performed based on the board-approved policy. Such board policy must include the roles and responsibilities of each co-branding partner, the risks associated with such co-branding arrangement, and the proper measures to mitigate those risks.
• Co-branding Partners can be a company, bank, government, and Ministries. If it is a company, co-branding partners must be duly registered under the Companies Act, 2013/1956. If co-branding patterns seem to be banks, then it must hold a certificate or license from the RBI.
• Co-branding partners must comply with the applicable laws and the KYC/AML/CFT norms.
• The PPI issuer will be held liable for all those acts done by their co-branding partners in cases related to the customer’s aspects, and their names must be displayed on the payment instruments.
• If there exists an agreement between two non-bank PPI issuers, then it must be clarified within the agreement, denoting the PPI party in between them. In the case of co-branding partners between a bank and a non-bank, then the bank will hold the responsibility of the PPI issuer and specify the role of the non-bank co-branding partner with a limitation to marketing, distribution, or providing services to PPI holders, etc.

Cross-Border Transactions

 The use of INR-denominated PPIs for cross-border transactions will not be permitted accordingly-

PPIs for Cross-border outward Transactions

• Full-KYC PPIs issued by those banks having AD-1 licenses will be allowed to carry out cross-border outward transactions only on some permissible current accounts.
• PPIs will not be used for any cross-border outward transfer of funds or making any transactions under Liberalised Remittances Schemes (LRS)¹.
• On the request of the PPI holders, PPI issuer will enable the facility of cross-border outward transactions with a limit of INR 10,000 per transaction, with a maximum limit of INR 50,000 in a month. PPIs are restricted under cross-border outward for not issuing any different category of PPI.

PPIs for Credit Towards Cross-Border Inward Remittances

• Banks and Non-bank PPI issuers duly appointed as Indian agents for authorized overseas principals are permitted to grant full-KYC PPIs to those inward remittance beneficiaries according to the Money Transfer Services Scheme (MTSS) of the Reserve Bank of India.
• PPIs under cross-border inward remittances are required to comply with the MTSS guidelines or norms prescribed by the Foreign Exchange Department of RBI.
• Only INR 50,000 from the end of individual inward MTSS remittances are permitted to be loaded and reloaded in full-KYC PPIs issued to the beneficiaries. PPIs are required to maintain the records of such transactions for scrutiny purposes.
• The PPI issuer’s roles and responsibilities will vary from those of a MTSS Indian agent.

Types of PPIs

PPIs up to INR 10,000 (with cash loading facility)

• Bank and Non-bank are allowed to issue PPIs up to INR 10,000 after accessing the basic details of PPI holders, including details such as a mobile number verified with a one-time password, self-declaration on the name along with an identification of any required document or identity card for the purpose to use as a KYC specified in the master direction from time to time.
• The PPIs must be reloadable in nature. The amount is restricted with a limit to be loaded as INR 10,000 within a month in such PPIs and up to INR 1 20,000 to be loaded during the financial year.
• An outstanding amount of INR 10,000 at any point in time will not be exceeded in the same PPIs.
• A total amount of INR 10,000 can be debited at any point of time within a month from such PPIs.
• The PPIs under this category must be used for the purpose of buying goods and services. Other facilities like cash withdrawals or transfers of funds are highly restricted under these PPIs.
• It is not restricted to using PPIs to the limit for the purchase of goods and services. The PPI issuer is allowed to decide the limit for the purpose within overall PPI limits.
• The PPIs will be further converted into full-KYC PPIs within a time period of 24 months from the issuing date of such PPIs. Failing to do so will not be allowed for further credit in such PPIs. Moreover, the PPI holder can use such balance available in the same PPIs.
• In the future, the same category PPIs will not be further issued again to the same person on the basis of the same mobile number and with minimum details.
• It is also mentioned for the PPIs to provide all the necessary details related to the issuance of such PPIs to the PPIs holder through email, SMS, or any other means prior to loading any funds in the PPIs.

PPIs up to INR 10,000 (with no cash loading facility)

• Bank and Non-bank are allowed to issue PPIs up to INR 10,000 after accessing the basic details of PPI holders, including details such as a mobile number verified with a one-time password, self-declaration on the name along with an identification of any required document or identity card for the purpose to use as a KYC specified in the master direction from time to time.
• The PPIs must be reloadable in nature. Loading or reloading will be performed using a bank account, credit card, or full-KYC PPI.
• The amount is restricted with a limit to be loaded as INR 10,000 within a month in such PPIs and up to INR 1 20,000 to be loaded during the financial year.
• The PPIs under this category must be used for the purpose of buying goods and services. Other facilities like cash withdrawals or transfers of funds are highly restricted under these PPIs.
• An outstanding amount of INR 10,000 at any point in time will not be exceeded in the same PPIs.
• It is also mentioned for the PPIs to provide all the necessary details related to the issuance of such PPIs to the PPIs holder through email, SMS, or any other means prior to loading any funds in the PPIs.

Full-KYC PPIs

• Banks and Non-banks are allowed to issue PPIs after complying with the KYC details of the PPI holders.
• Video-based customer verification is required as specified under the master direction in order to open a full-KYC PPI or convert a small PPI into a full-KYC PPI.
• The PPIs must be reloadable in nature, and an outstanding amount of INR 2 00,000/- at any point in time will not be exceeded in the same PPIs.
• The funds can be easily transferred back to the account’s source or to the PPI holders’ account.
• Under these PPIs, the PPI issuer is directed to provide the pre-registered beneficiaries for the PPI holder, where the PPI holder can easily add their beneficiaries, including their bank account details, when required by them.
• The funds transferred limit will not be exceeded by more than INR 2 lacs per month for the pre-registered beneficiaries. PPI issuers are required to set limits considering the risks associated with the PPI holders.
• Funds transfer limits are restricted by INR 10,000 regarding all cases.
• The PPI issuer must provide all the necessary details related to the issuance of such PPIs to the PPI holder through email, SMS, or any other means before loading any funds in the PPIs.

Validity and Redemption of PPIs

• All the issued PPIs within the country hold a minimum validity of 1 year from the last date of its loading or reloading in the PPI.
• Moreover, the PPI issuers are allowed to issue PPIs for longer validity. If the PPI is issued in the form of a card, it needs to be mentioned about its validity date on the card. It helps the customer to make a request for a new card or its replacements.
• PPI issuer should mandatorily inform their customers or PPI holders about the expiry date of issued PPI prior to 45 days from its expiry.
• If there seems to be a condition where no claims are raised at the time of closing or expiring of such PPI account and suppose some amount is lying within the PPI account. In such a situation, a non-bank PPI issuer is not allowed to transfer such amount directly into their profits or loss account till the expiry of 3 years from the closure date of such PPI account.
• Further, the PPI amount will be transferred into the account of the PPI holder on a written request.
• If, in case, there is no such financial transaction done for a consecutive period of 1 year, the PPI issuer is allowed to make an inactive account after sending notice to the PPI holder. It can be further reactivated after complying with necessary due diligence after reporting separately about the same to RBI.

Deployment of money collected

Banks and Non-banks use to issue PPIs for the PPI holders and keep their funds with them, which requires safety measures so as to secure the funds of PPI holders. Thus, the Reserve Bank of India has described the process for the deployment of collected funds through the PPI issuer.

Bank PPI issuer

Under the bank-operated schemes, the outstanding balance is based upon the Net demand and time liabilities to maintain the reserve requirement. This position will be calculated on the basis of the appearing balances on the books of banks. 

 Non-Bank PPI Issuer

Non-bank PPI issuers need to maintain their outstanding balance using an escrow account under any scheduled commercial banks. Usually, Non-bank requires an additional escrow account to maintain their outstanding balance. The maintenance of the escrow balance requires complying with the following conditions-

• The balance in the escrow account shall not, at the end of the day, be lower than the value of outstanding PPIs and payments due to merchants.
• PPI issuers are required to ensure immediate fund credits to escrow either on issue, load or reload of PPIs. Under any situation, it is mandated that such credit be later than the close of business day. Such requirements need to be followed and monitored by the PPI issuer on a regular business day, and if any shortfall shall be reported to the Regional Office of DPSS, RBI immediately.
• Only a specified type of debits and credits will be allowed within the escrow accounts-

Credits

• Payments received towards issue, load / reload of PPIs, including at agent locations.
• Refunds received for failed/disputed/returned/cancelled transactions.
• Payments received from sponsor banks towards settlement obligations from participation in interoperable payment systems, as permitted by RBI from time to time.

Debits

• Payments to various merchants/service providers towards reimbursement of claims received from them.
• Payment to sponsor bank for processing funds transfer instructions received from PPI holders as permitted by RBI from time to time.
• Payments made to sponsor banks towards settlement obligations from participation in interoperable payment systems, as RBI occasionally permits.
• Payment towards applicable Government taxes.
• Refunds towards cancellation of transactions. The funds shall be credited back to the same source from where these were received. These funds are not to be forfeited till the disposal of the case.
• Any other payment due to the PPI issuer in the normal course of operating the PPI business (for instance, service charges, forfeited amount, commissions, etc.).
• Any other debit as directed by the regulator/courts/law enforcement agencies.

Customer Protection And Grievance Redressal Mechanism

• PPI issuers, at the time of issuing any PPIs to the holders, are more likely to disclose the terms and conditions of such PPIs in a clear and simplified manner. Such conditions must be published in English, Hindi, or any other local language as preferred by the PPI account holders before issuing those PPI instruments for holders.
• In the same manner, disputes will more probably be bound to arise and thus require a mechanism for the PPIs holders to get it resolved and handled in an effective manner by the PPIs issuers.
• Customers are required to easily access Toll- the free number or any customer helpline including the nodal officer contact details to raise disputes, know the validity of PPIs issued, avail brochure related to PPIs terms and conditions, URL of concerned PPIs website and the mandatory information regarding changes in PPIs.
• PPI issuers are bound to resolve the complaints within a period of 48 hours from the date of its receipts and further address the same complaint for not more than a period of 1 month if additional aspects are to be resolved.
• PPI issuers are required to display a detailed list of their authorized agents on their concerned PPIs’ website.
• PPI issuers are directed to educate their customers about sufficient awareness and the usage of PPI accounts and guide them with safety tips to secure holders’ accounts by advising them to keep their passwords confidential.

Conclusion

The Reserve Bank of India to ease out the transferring of money to make the payments faster. Thus, several forms of payment wallets or PPIs are made available for PPI holders, such as Debit or credit cards, internet wallets, and mobile, including paper vouchers. Wallets are more likely to be similar to bank accounts. An individual can easily use those funds available in the wallet as comparable to the bank account. Thus, the Reserve Bank of India has formulated some guidelines related to the functioning of wallet platforms to safeguard and protect the customers’ money.

1. https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=1834