Reserve Bank of India Proposes New Regulations for Prepaid Payment Instruments

The proposed rules for PPI regulation were unveiled by the Reserve Bank of India (RBI) on April 22. The next set of regulations, titled the draft Master Direction on Prepaid Payment Instruments (PPIs), 2026, is intended to supersede the master directions from 2021. Additionally, it will bring a better organised system for financial institutions, fintech companies, and wallet operators.

The RBI states that the purpose of the proposed regulations is to secure transactions made possible by PPIs and to create conditions favourable to their long-term growth. The public have until May 22 to provide feedback on the framework, which broadens use cases, including UPI-linked wallets for international tourists.

PPIs and Their Framework

In accordance with the guidelines that have been proposed, PPIs are defined as payment instruments that allow for the loading of funds and the subsequent use of these funds in later transactions. To put it simply, PPIs are electronic payment systems that let users store funds for use in digital transactions. The more clear separation of PPIs into general-purpose and special-purpose instruments is one of the key points of the proposed regulations. Full KYC PPIs and small PPIs are the two subsets of these PPIs.

Following a user's complete compliance with Know Your Customer (KYC) regulations, a full KYC PPI would be provided. These instruments must have a minimum validity of one year and a maximum amount that can be debited in a month and a total outstanding amount that cannot exceed INR 2 lakh. The monthly limit for P2P financial transfers from this PPI is INR 25,000, while the monthly limit for cash loading is INR 10,000. RBI has authorised wallet operators to issue small, one-time PPIs after collecting minimal consumer data in the event that full customer due diligence cannot be completed.

The small PPI needs to be updated to full-KYC PPI during the validity term, which is two years. The total amount debited from a small PPI during any month will not exceed INR 10,000, and the amount outstanding for a small PPI at any given moment shall not exceed INR 10,000. Users will not be able to withdraw cash or send money to another person using this PPI.

PPIs to Change the Dynamics of Banking Sector

With advance notification to RBI, banks that are now authorised to issue debit cards will be able to issue PPIs under the new system. To achieve the minimum net-worth standards, non-bank issuers must seek approval from the central bank to issue such securities. Current regulations state that applicants who are not banks must demonstrate a net worth of at least INR 5 Cr when they apply. Further, by the conclusion of the third financial year of authorisation, they must have surpassed the INR 15 Cr barrier.

Along with the applicants, the promoters and directors must meet RBI's fit-and-proper standards, which include honesty, good character, and financial integrity. Also, non-bank issuers are no longer allowed to negotiate KYC compliance under the proposed standards. While the proposed master directives do not prohibit the issuance of tiny PPIs with few details, they do encourage their conversion into full-KYC PPIs. As part of the new system, the RBI has increased its supervision of escrow accounts.

Issuers that are not banks must maintain a separate escrow account with a scheduled commercial bank for the purpose of holding PPI proceeds. A quarterly auditor certification is necessary, and these monies can only be utilised for permitted PPI business. With the exception of a specific "core portion amount" of the account, interest will not be paid on any amounts held in the escrow account.