Payments Digest by Cashfree: June 2021- Enabling daily NACH

Asheeta Regidi Head, Fintech Policy at Cashfree.

Via our Payments Digest, we aim to provide a view on key developments with payments regulations each month. Discussions for Edition 6: NACH will soon be available all days of the week- how do merchants benefit? New regulations for NBFC-MFIs are proposed- how will digitisation help here? The NPCI asks to increase awareness of UPI’s overdraft linking facility, and more. 


PART I: NACH mandates will soon be processed on all days of the week

In good news for recurring payments, NACH will be made available all days of the week starting August 1st, 2021, as per the RBI. NACH is a recurring payments solution from NPCI, popular for business use cases like bulk payment of salaries/ dividends/ direct benefit transfers, etc. or bulk collection of  loan/insurance/SIP instalments, etc. The development now opens NACH to a string of new use cases like SaaS and e-commerce, where adoption is currently low due to its availability on bank working days alone.

How merchants benefit

In case of bank holidays, Sundays, etc., NACH payments are currently pushed to the next working day. Now most recurring payments are date-specific, which primarily allows NACH for use-cases unaffected by the occasional postponement. Loan collections by NBFCs for instance are more flexible, while SIP instalments are anyway processed only when mutual fund houses are working. 

For some merchants however, accommodating this delay is complicated, requiring redesigning workflows, pre-planning for mandate file uploads, delays in reallocation of funds post receipt, etc. E-commerce, delivery payments, subscriptions for streaming services, etc., are examples here. The delay is also an issue where billing cycles are prorated, i.e., specific to the number of days of use, like for many SaaS and other subscription based service providers. NACH mandates can also either be via a direct autodebit, or via an ‘as and when presented’ payment request which is followed by an autodebit on failure to pay by a certain date. Issues again arise if this date falls on a non-working day. 

The RBI announcement thus allows NACH to be used for all such use cases, thus expanding its scope. Additionally, the step comes at a good time, given the hurdles card based e-mandates (SI or standing instructions) have run into recently with the new framework to be in place by September this year.  

Next step- the infrastructure level

The step basically leverages the 24×7 availability of RTGS, which NACH uses for settlement. Post the RBI announcement, the next step now will be enabling daily NACH at an infrastructure level by the NPCI, followed by technical changes by banks and then by payment companies. 

(Related Read: Payments Digest by Cashfree: March 2021- E-mandates & card storage extensions, & UPI Volume Cap SOPs)


PART II: Regulating microfinance- Calling for innovation with income assessment and client profiling

The RBI is aiming to redo NBFC-MFI (Microfinance Institutions) regulations, even while reviewing NBFC regulations in general. Its Consultative Document, which proposes uniform regulations for all regulated lenders in the microfinance space, has so far received a mixed response- generally seen as positive for NBFC-MFIs and end-consumers, but slightly restrictive for banks in the space. Comments have been invited till end-July. 

Digitising payments and microfinancing itself 

Among the challenges the Consultative Document identifies is underwriting, which brings in the payments perspective. Secured micro-loans are difficult since microfinance borrowers usually don’t have assets they can offer as collateral. To provide unsecured loans, lenders need an effective means of assessing household income, business cashflows, etc. In cash driven regions, this runs into difficulties without proper data. The Consultative Document calls for innovation here, and last-mile digitisation of payments is an important step towards this. Transaction data generated for example can aid credit scoring or allow cashflow based lending. Take UPI- a simple and key solution here, while facilities like UPI’s AutoPay and Overdraft on UPI allow digitising microfinancing itself, enabling digitised loan disbursals and collections. 

The microfinance space has specific needs, for example, repayments happen most often on a daily or weekly basis, for example for daily wage labourers. Borrowers also need more flexibility to postpone payments say to the next day.  UPI accommodates these needs- allowing low value transactions, payment flexibility, on-demand mandates, etc. This is also important given the pandemic, where there is a need for access to credit to stay afloat, and also a need to minimise human contact. Lastly, digitisation also plays a key role in reducing processing costs, unlike those involved with cash collections, which can be a significant expense with small-ticket loans.

(Related Read: The Indian Recurring Payments Landscape: Tapping into the Potential of UPI AutoPay)

Easing KYC and onboarding checks

Apart from this, a new regulatory framework is also welcome for payment companies from a KYC and onboarding checks perspective. The proposed requirements like a Fair Practices Code, Board approved policy for income assessments, repayment flexibility, no pre-payment penalties, etc., allow defining customised and clearer checks from a due diligence perspective for NBFC-MFIs.


PART III: Increasing overdraft linked transactions on UPI

Among UPI 2.0’s features when launched in 2018 was allowing overdraft (OD) accounts to be linked for UPI transactions. The NPCI has recently directed merchant partner banks, acquirers and aggregators to:

  • inform merchants of this facility,
  • clearly outline charges for OD accounts in UPI, and 
  • UPI banks and TPAP apps are to notify end-merchants if the merchant is not enabled for OD for any reason.

The benefits of Overdraft facilities on UPI

Merchants are familiar with overdraft facilities, which is essentially secured/ unsecured access to credit that a bank grants on an account, allowing payments, etc., to continue even if the account has insufficient funds. For merchants, this is valuable as access to additional working capital. Now UPI 1.0 had a stronger focus on P2P transactions, and allowed linking of current and savings accounts. UPI 2.0 on the other hand focussed on supporting merchants and P2M transactions. Along with several other ‘merchant-first’ features like one-time mandates, invoice verification, etc., it allowed linking overdraft accounts. 

Thus a merchant can now link multiple accounts- savings, current and overdraft, to a single UPI app. For merchants, this essentially enables credit based transactions via UPI, also making it a key enabler for disbursal and collection of small-ticket loans. It also adds a new digital channel for transacting from an OD account- in addition to net banking and other such traditional modes. Further, it offers a way to commence transacting instantly from the OD account, avoiding delays in enabling other modes. 

KEY FEATURES IN BRIEF, AS OUTLINED BY THE NPCI
An existing OD account can be fetched and linked with UPI the same way as other current/savings accounts.
Customers can choose the same or a new UPI ID or Pin for this.
If a transaction is received on an OD linked UPI ID, then this works as OD repayment. 
For secured OD accounts- both P2P and P2M transactions are allowed. For unsecured OD accounts- only P2M transactions are allowed. 
UPI apps need to display available and actual/usable balance from the OD account.
Banks are responsible for the signing of T&Cs with customers, and need to communicate due dates, outstanding amounts, interest charges, etc. to customers on a regular basis.
Applicable charges- OD interchange fee- 1.5% of transaction value for the Unsecured OD account

Others: FATF restrictions on investments in PSOs, Mobile recharges via BBPS, and NACH mandates for pensions

  1. FATF restrictions on investments in PSOs: The RBI has restricted investments in payment system operators from FATF non-compliant jurisdictions. This follows similar restrictions for investments in NBFCs issued earlier this year:
  • Investments in existing PSOs prior to classification of the source/intermediate jurisdiction as FATF non-compliant can continue, and additional investments can also be brought in so as to support business continuity. 
  • New investments from non-compliant jurisdictions, whether in existing PSOs or entities seeking authorisation are not permitted to directly or indirectly acquire ‘significant influence’ as per the applicable accounting standards of the concerned PSO. Fresh investments in aggregate should account for less than 20% of the voting power of the PSO.
  • FATF non-compliant jurisdictions include Iran and North Korea (high risk), and Cambodia, Ghana, Jamaica, Mauritius, Myanmar, Pakistan, Syria, Uganda, Yemen, Zimbabwe, etc. (under increased monitoring).
  1. Mobile recharges allowed via BBPS: In another positive step for recurring payments, the RBI removed the final restriction on BBPS enabled payments, adding mobile prepaid recharges as an additional biller category. The initial 5 bill payment categories- Direct to Home (DTH), Electricity, Gas, Telecom and Water, were expanded in 2019 to include all biller categories, with the exception only of prepaid recharges. Now the removal of this final exclusion allows harnessing the full potential of this platform. 
  1. PFRDA allows NACH mandates: PFRDA has recently adopted NACH based mandates (physical) for pension transfers. The reasons the PFRDA outlined illustrate some of NACH’s benefits- (i) it will ease health risks to officers who previously needed to personally visit banks each time to enable the transfers each time, and (ii) it aims to reduce returned transfers, due to errors ranging from incorrect/expired transaction IDs, receipt of duplicate funds, mismatched file and actual remitted amount, etc., which hampered timely remittance.

That’s all for this edition. Stay safe.


Bibliography

  1. Article by Asheeta Regidi: Payments Digest by Cashfree: March 2021, Cashfree Blog.
  2. Article by Asheeta Regidi & Reeju Datta: The Indian Recurring Payments Landscape: Tapping Into UPI AutoPay’s Potential, Medici Global, dated 25 August 2020. 
  3. Edelweiss Report by Prabhakar Agarwal & Santanu Chakrabarti: Sector Update on Microfinance: Intent Strong, Implementation Challenging, dated 15 June, 2021.
  4. FATF Publication: High-Risk Jurisdictions subject to a Call for Action, dated  21 February 2020. 
  5. FATF Publication: Jurisdictions under Increased Monitoring – June 2021.
  6. Kotak Institutional Equities Report: Kotak Securities India Daily, dated 15 June, 2021.
  7. NPCI Notification: Rollout of the features of UPI 2.0, NPCI/UPI/OC No. 56/2018-19, dated 14 August, 2018. 
  8. NPCI Notification: UPI OD accounts for merchant acceptances – terms and awareness, NPCI/UPI/OC No. 108/2021-22, dated 28 May, 2021. 
  9. PFRDA Circular: Launch of NACH mandate for the benefit of Nodal Officers/PoP/Corporate, CIR No. PFRDA/2021/18/SUP-TB/1, dated 4 June, 2021.
  10. RBI Notification: Bharat Bill Payment System – Expansion of biller categories, RBI/2019-20/61, dated 16 September, 2019. 
  11. RBI Notification: Investment in NBFCs from FATF non-compliant jurisdictions, RBI/2021-22/55, dated 12 February, 2021. 
  12. RBI Notification: Bharat Bill Payment System – Addition of Biller Category, RBI/2021-22/54, dated 14 June, 2021.
  13. RBI Notification: Investment in Entities from FATF Non-compliant Jurisdictions, RBI/2021-22/55, dated 14 June, 2021.
  14. RBI Press Release: RBI announces date for launching of RTGS 24×7, 2020-2021/748, dated 9 December, 2020.
  15. RBI Press Release: RBI releases Consultative Document on Regulation of Microfinance, 2021-2022/360, dated 14 June, 2021. 
  16. RBI Press Release: Statement on Developmental and Regulatory Policies, 2020-2021/1051, dated 5 February, 2021. 
  17. RBI Press Release: Statement on Developmental and Regulatory Policies, 2021-2022/319, dated 4 June, 2021.
  18. RBI Publication: Discussion Paper on Revised Regulatory Framework for NBFCs – A Scale-Based Approach, dated 22 January, 2021.
Asheeta Regidi Head, Fintech Policy at Cashfree.