Introduction
The proliferation of fintech in India has experienced significant growth in recent years, primarily attributed to various catalysts such as the government’s ardent emphasis on a digital economy and the surge in mobile and internet usage. Fintech in India was first instigated during the early 2000s, with the promotion of financial inclusion and the establishment of microfinance institutions. However, it was the advent of mobile technology and the internet that sparked a major turning point in India’s fintech industry. As of today, India’s fintech landscape has burgeoned into a thriving ecosystem of companies that offer diverse financial products and services, encompassing the popular and ever-growing buy now, pay later (BNPL) services. The BNPL concept enables consumers to make purchases without immediate payment, with the added benefit of no interest or fees. This particular model has become particularly alluring among the younger demographic, who seek more pliant payment alternatives.
Regulatory Framework on the Growth and Sustainability of Buy Now Pay Later (BNPL) Services in India
In India, Buy Now Pay Later (BNPL) services are presently not regulated by any specific laws or regulations. However, some companies providing BNPL services are registered with the Reserve Bank of India (RBI) as Non-Banking Financial Companies (NBFCs) and are subject to regulations applicable to NBFCs, such as the RBI’s Master Directions for Non-Banking Financial Companies, 2016. These regulations mandate NBFCs to adhere to specific capital adequacy norms, maintain appropriate risk management frameworks, ensure fair lending practices, establish a board for settling customer’s grievances among other things.
Furthermore, the RBI has issued guidelines for digital lending platforms titled “Report of the Working Group on Digital Lending” that offer loans through banks or NBFCs, which require disclosure of the names of the banks or NBFCs on whose behalf lending is done, ensuring borrower understanding of loan terms and conditions, and complying with data privacy and protection requirements. These guidelines provide some level of oversight and protection for customers availing BNPL services offered by registered NBFCs. However, they do not specifically regulate BNPL services.
Nonetheless, concerns have been raised regarding the lack of regulation for BNPL services in India, particularly with respect to the high interest rates and fees charged by some providers, and the potential for customers to fall into debt traps. As a result, the RBI has announced that it is examining the regulation of digital lending platforms, including BNPL services. A working group has been established to study the issues and challenges in the digital lending space and make recommendations for appropriate regulation. Although it is unclear what specific regulations will be put in place for BNPL services in India, they are likely to be required to adhere to guidelines and regulations similar to other digital lending platforms.
BNPL: A Risky Road and need for Regulation
It is evident that fintech facilities as provided by Buy Now Pay Later is a recently developed technology. The lack of regulation from Reserve Bank has resulted in growing concerns among experts and the interested parties in the sphere. The development in the field of mechanism aiming at delivering easy access to credit, needs for a more vigilant outlook. BNPL fintech services have raised several concerns, including disguised fees, information asymmetry, repossession without notice, unfair default provisions, and unequal bargaining power. Disguised fees can hinder transparency, leading to unexpected expenses and financial difficulties for consumers. Information asymmetry is a related issue, as BNPL providers may not disclose important details about their services, such as the impact on credit scores. Repossession without notice is another concern, as some providers may have the right to repossess items without adequate warning. Unfair default provisions can lead to changes in terms or increases in fees without sufficient notice, causing budgetary challenges for consumers. Finally, unequal bargaining power may occur when BNPL providers hold an advantage over vulnerable consumers, hindering their ability to negotiate and assert their rights. These concerns should be carefully considered by consumers before entering into BNPL agreements
The precise concerns relating to Consumer Protection
Consumer protection laws in India are not as comprehensive as those in the United States. While the Usurious Loans Act of 1918 prevents predatory lending by private entities, it does not apply to banks and non-banking financial companies (NBFCs). The Reserve Bank of India (RBI) has introduced regulations for banks and NBFCs through the Fair Practice Code for Lenders, but these rules do not encompass lending conducted through contractual agreements. In 2017, the RBI issued a directive requiring peer-to-peer (P2P) lending platforms to ensure that loan facilitation is exclusively conducted by an NBFC. However, given that only 22 companies are registered as NBFC-P2P, the online lending sector largely lacks effective regulation in terms of consumer protection.
Numerous third-party Buy Now, Pay Later (BNPL) applications, accessible through app stores, notably lack regulation and legitimacy. These applications, some of which have origins in China, operate without a reputable policy framework or institutional backing. Consumers have expressed apprehension over the data privacy risks associated with these unregulated apps. While certain BNPL providers have robust support systems and non-payment can negatively impact a customer’s credit score, a multitude of unverified apps offer zero-cost EMI financing without a credible foundation. These applications thrive on consumer data, gaining access to users’ contacts and other personal information via mandatory permissions. Concerns have arisen regarding the harassment of consumers by these platforms, which frequently reach out to individuals from the user’s contact list, often inquiring about the user’s financial capacity. Although the government has made considerable attempts to identify and prohibit these apps, the ongoing proliferation of such applications remains a source of apprehension. Of particular concern is the predatory nature of these apps, the target of whom are the students and unemployed of the new generation who have limited or no income sources, forming a substantial user demographic for these services.
A look in to Foreign Jurisprudence
To address consumer concerns about the risks posed by BNPL loans, the UK government intends to regulate BNPL products by amending the Consumer Credit Act 1974 to require FCA approval and affordability checks from lenders, subjecting advertisements and incentives to the Financial Promotion Regime, and allowing consumers to file complaints with the Financial Ombudsman Service. To address similar challenges, the EU Council has voted to modify the Consumer Credit Directive. While the proposed revisions are largely supported, differences in consumer credit regulation across member states may result in inconsistencies. The new laws will require lenders to clarify terms and conditions, assess borrowers’ repayment capabilities and understanding of the loans, and alter pricing guidelines and creditworthiness considerations.
In response to a parliamentary inquiry, the Monetary Authority of Singapore (MAS) stated that the potential risks of consumer indebtedness through Buy Now Pay Later (BNPL) schemes offered in Singapore are deemed to be insignificant. This can be attributed to several features incorporated by BNPL providers that limit the extent of debt accumulation by consumers. For instance, BNPL providers typically suspend users from making further purchases once payments are overdue. Moreover, BNPL schemes generally do not charge compounding interest on outstanding amounts, and late fees are capped to prevent excessive debt accumulation. In light of this, the probability of rapid debt accumulation through BNPL schemes is considered to be relatively low in Singapore. However, the MAS has proposed a new regulation that will set a limit on the amount of BNPL transactions for individuals with outstanding unsecured debt, aiming to prevent consumers from accruing high levels of debt through BNPL schemes.
The Road Ahead
In recent years, India’s Buy Now Pay Later (BNPL) market has witnessed remarkable growth, raising concerns that demand swift regulatory attention. While some BNPL providers have voluntarily registered with the Reserve Bank of India (RBI) as Non-Banking Financial Companies (NBFCs) and adhered to relevant NBFC regulations, a more comprehensive regulatory approach is needed to tackle the complex challenges associated with BNPL services.
A critical concern is the lack of transparency in terms and conditions, along with potential fraud, theft, or consumer harassment. Legislation should compel BNPL providers to provide comprehensive terms and conditions to consumers, eliminating hidden fees or deceptive practices. Furthermore, stringent data protection measures must be established to safeguard consumers’ personal and financial information, reducing the risk of data breaches and identity theft. The RBI has acknowledged these challenges by establishing a working group to regulate digital lending platforms, including BNPL services, and create a robust regulatory framework. For instance, the RBI has already acted to discontinue the use of BNPL services for refilling digital wallets. Yet, further regulation is needed, particularly regarding mandatory registration or licensing before BNPL apps can be listed on app stores or the Google Play Store. Mandatory registration will establish regulatory oversight for Buy Now, Pay Later (BNPL) providers, enhancing consumer protection against potential risks inherent in BNPL services, such as excessive debt and data privacy concerns. This framework will ensure equal treatment among all financial institutions, subjecting BNPL providers to the same regulatory standards as other lenders. As a result, consumer confidence in these platforms will be bolstered, imbuing them with a sense of legitimacy.
(This article has been authored by Aditya Chib, a fourth-year law student at National Law Institute University, Bhopal)
CITE AS: Aditya Chib, “BNPL in India: A Convenient Solution with a Dark Side” (The Contemporary Law Forum, 12 November 2023) <tclf.in/2023/11/12/bnpl-in-india-a-convenient-solution-with-a-dark-side> date of access