Author: Vaibhav Kashyap – a student of National Law University, Odisha.
BNPL (Buy Now Pay Later) is a point-of-sale credit that allows consumers to pay for goods over a small period while receiving such goods as if the payment was made upfront. Initially ignored as another form of installment-based credit, the BNPL market picked up during the course of Covid-19 pandemic. The BNPL market expanded by a huge 569% Y-O-Y in 2020 while it grew by 637% Y-O-Y in 2021. Though the amount disbursed through BNPL was only 0.73 % of total loans in the case of commercial banks and 2.07 percent in the case of NBFCs, the BNPL constituted 37% of the total number of loans disbursed for commercial banks and 11.91% of the total number of loans disbursed in the case of NBFCs. Therefore, while the customer base is very high, the amount disbursed is very small. This can be explained by the fact that BNPL schemes are highly popular on e-commerce sites where they credit small consumer purchases. The increased popularity of BNPL can be attributed to the fact that traditional credit card involves extensive paperwork, hidden charges, and frauds, and is, therefore, still limited to prime and sub-prime customers.
But the huge growth and popularity of BNPL has put a spotlight on them and regulators have put their ire on BNPL schemes. In its recent report titled "Report of the Working Group on Digital Lending", the Reserve Bank observed that some private sector banks and foreign banks provided the customers with Buy Now Pay Later (BNPL) loans facility. It notes that BNPL should be treated as part of balance sheet lending and that a suitable notification might be issued by the Government of India since these products do not meet the requirements of traditional credit facilities. One of the important suggestions includes bringing BNPL loans under the definition of credit.
The traditional definition of credit doesn't include BNPL and therefore they are able to bypass the regulations that apply to other credit providers. In fact, abroad, some BNPL providers claim to be service providers and payment gateways rather than credit providers and avoid regulation. In India, the NBFCs and banks are showing BNPL credit as deferred payment on their balance sheet but when they turn NPA, they treat it as a loan on the balance sheet. Generally, the NBFC charges no rate of interest for a small period whereafter it is turned into EMI with an interest. The fact that no interest or service fee is charged strengthens the argument that BNPL doesn't fall in the category of credit.
The recent growth in BNPLs raises many new unanswered legal issues:
- Do BNPLs fall under the definition of "credit"? Should the definition of credit be changed, or a whole new set of regulations targeting BNPLs be brought?
- Do BNPLs boost predatory lending and if they do whether there is a need for better consumer protection regulation?
Do BNPLs fall under the definition of "credit"? Should the definition of credit be changed, or a whole new set of regulations targeting BNPLs be brought?
Presently, there is no statutory definition of "credit" in India. The Reserve Bank of India has defined what constitutes consumer credit through its master circular. Among other categories, it also includes "loans for consumer durables" as a form of credit. But a large portion of BNPL loans is generally not used to purchase "consumer durables". In fact, the majority of BNPL loans are used for financing small consumer goods rather than more costly "consumer durables".
The "Bureau of Consumer Financial Protection" in the USA defines "credit" to mean the "right granted by a creditor to an applicant to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment therefor". When looked at through the lens of the above definition, the BNPL arrangement would qualify to be a credit since they ultimately allow deferring the payment. But in the lack of any such comprehensive definition in India, there is ambiguity as to whether BNPL falls within the purview of "credit". Nevertheless, BNPLs are essentially credit instruments since they allow the customers to pay later and incur a debt- two essential requisites of credit. Yet BNPL doesn't charge any interest or even service fees when the loan is paid on time. This, argued by many, exempts it from being called a credit.
Many stakeholders have called for bringing specific regulations for BNPL and argue that though they are essentially credit, they involve a whole new manner of credit creation. They argue that it may be necessary to exempt from or impose additional regulations on BNPL arrangements, aside from the minimum level of credit regulation, especially seeing the small size of the loans being disbursed. In fact, this might be a better approach to take since BNPL not only involve a small loan size, they also help in the financial inclusion of the poor.
Do BNPLs boost predatory lending and if they do whether there is a need for better consumer protection regulation?
Notwithstanding the benefits that credit brings to society, there is a need to regulate credit for the benefit of the consumer in particular and the society at large. Consumers may be myopic and might not see the larger picture while taking credit. This is especially more relevant with BNPL since they are very easily accessible to customers. In fact, the largest chunk of BNPL consumers is in the age group of 18-24 which makes it even more vulnerable to risk. Concerns include high fees, disguised fees, information asymmetry, repossession without notice, unfair default provisions, and unequal bargaining power. All these reasons call for robust consumer protection while accessing credit through BNPL.
India doesn't have a dedicated regulation for protecting the interests of the consumer on the lines of the USA. The only dedicated law for preventing predatory lending is Usurious Loans Act, 1918. But this law is limited to the extent that it applies only to private players and banks and NBFCs are not regulated by the act. The RBI regulates the lending practices of the banks and NBFCs vide its master circular on the Fair Practice Code for Lenders. But since this regulation was not applicable for lending through contracts, the Reserve Bank, issued a comprehensive direction for P2P lending platforms in the form of 'Master Directions – NBFC: P2P Lending Platform Directions, 2017'. It mandated that loan facilitation under a contract, online or otherwise, which is done on any platform (like amazon), should only be undertaken by an NBFC. The NBFCs were also tasked with ensuring appropriate compliance for these platforms. However, as of September 30, 2021, only 22 companies have registered with the RBI as an NBFC-P2P, while there are about 1,100 lending apps that are available online. All of this leaves this online financial sector largely unregulated from the point of consumer protection.
Therefore, the BNPLs must be better regulated to protect the customer from predatory lending. In fact, there is a need for data protection with regard to online credit providers. Consumers should have a choice to protect their data. But, in the absence of a data protection regime, there is hardly any precedent to protect consumer data for BNPL customers.
Conclusion
The BNPL market is on the brink of new consumer protection regulations. It involves a whole new issue brought about by the development of financial technology. In the Indian context, with minimal consumer credit protection, a discussion on the regulation of Fin-Tech, Tech-Fin, and specifically BNPL must be done. While regulations are important, it should be kept in mind that the regulation doesn't siphon the growth of BNPL. The BNPL has the potential to revolutionize the credit service to the poorer sections of society still untouched by credit. But at the same time, we should be mindful of a potential mountain of NPAs.
Buy Now Pay Later: Regulatory Ambiguity And Consumer Protection
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