RBI Norms For Semi-Closed Wallets In India 

Concept of Prepaid Payment Instruments (PPIs) or digital wallets or e-wallets (Electronic Wallets) has spread widely in India over the last few years. PPIs or e-wallets are almost used everywhere to procure goods and services and for transfer of funds from one person to another. Accepting payments through digital wallets also accelerates business turnover. To promote a cashless environment, digitalisation and contact less payments, the government is taking all the possible steps to promote PPIs. Various PPIs have been issued so far in India such as Bharatpe, Paytm, UPI, Phonepe etc. and PPIs is issued by both banking and non-banking companies.

Similar to bank accounts, Digital wallets contain money in digital form. However, in comparison to banks, it is quite easy to use the funds lying in digital wallets. Therefore, similar to banks, regulations are also required on the companies which are operating PPIs payment platforms. Therefore, to ensure safety and protection of customer’s funds, Reserve Bank of India has issued various regulations and circulars on issuance and operations of PPIs.

Following three types of prepaid instruments are issued in India:

1. Closed System PPIs
2. Semi-Closed PPIs
3. Open System PPIs

Closed wallets, can’t be used for third party payments, do not require authorisation and approval by RBI. However, various regulations are specified for Semi-Closed wallets by the Reserve Bank of India. In this article, a detailed discussion has been carried out of norms laid down in India for Semi-Closed wallets.

1. What is a Semi-Closed Wallet

• These digital wallets or PPIs are used for purchase of goods and services, including financial services, remittance facilities, etc., at a group of clearly identified merchant locations / establishments.
• These PPIs can be used for payment or remittance with those third parties which have a specific contract with the PPI issuer to accept the PPIs as payment instruments.  Such a contract can be entered through a payment aggregator or payment gateway and does not need to be directly entered between PPI issuer and merchant.
• However, These instruments do not permit cash withdrawal.
• Semi closed System PPIs are issued only by banking institutions which are approved by RBI or non-banking Institution authorised by RBI.
• Paytm Wallet is an example of Semi-Closed System PPIs. Balance lying in paytm wallet can be used for purchase of goods from such a third party which is registered with Paytm as merchant.

To sum up, Semi-Closed Wallets are handy payment instruments which are used with a group of pre-identified merchants.

2. Who is Eligible to issue semi-closed wallets

RBI has issued “Master Direction on Issuance and Operation of Prepaid Payment Instruments” vide Direction No. RBI/DPSS/2017-18/58 Master Direction DPSS.CO.PD.No.1164/02.14.006/ 2017-18 dated 11th October 2017.

As per such master directions, semi-closed wallets can be issued by:

1. Banks which comply with the eligibility criteria, including those stipulated by the respective regulatory department of RBI, after obtaining approval from RBI.
2. Non-bank entities which comply with the eligibility criteria, including those stipulated by the respective regulatory department of RBI, after obtaining authorization from RBI.

Approvals and authorizations are obtained from RBI by filing an application under Payment and Settlement Systems Act, 2007.

3. What is the eligibility criteria for a semi-closed wallet

As per master directions, all Banking and Non-Banking entities filing applications with RBI for approval and authorisation of semi-closed payment PPIs must comply with minimum capital requirement and other eligibility criteria.

Read about capital and other eligibility requirements for Semi-Closed wallets.

4. What is the process for obtaining Authorisation from RBI

• A non-bank entity desirous of setting up Semi-closed payment PPIs, shall apply for authorisation with RBI in Form A under the Payment and Settlement Systems Regulations, 2008 along with the requisite application fees.
• The RBI shall carry out the initial screening of application to ensure prima facie eligibility of the applicants. RBI shall also check ‘fit and proper’ status of the applicant and management and for this purpose it may obtain inputs from other regulators, government departments, etc., as deemed fit. 
• Applications which are incomplete or non in prescribed format or not meeting the eligibility criteria shall be returned without refund of the application fees.
• Apart from compliance with applicable guidelines, RBI shall also apply other checks on certain essential aspects like customer service and efficiency, technical and other related requirements, safety and security aspects, etc. before granting in-principle approval to the applicants.
• Subject to meeting the eligibility criteria and other conditions, the RBI shall issue an ‘in-principle’ approval and it shall remain valid for a period of 6 months.
• The entity shall submit a satisfactory System Audit Report (SAR) to RBI within these 6 months, failing which the in-principle approval shall lapse automatically. SAR shall be accompanied by a Chartered Accountant certificate regarding compliance with minimum requirement of net worth. An entity can seek a one-time extension, maximum period of 6 months, for submission of SAR by making a request in writing. However, The RBI reserves the right to decline such a request for extension.
• Subsequent to the issue of approval, if RBI comes to know about any adverse features regarding the entity / promoters / group or business practices, etc., then the RBI may impose additional conditions and if warranted, the in-principle approval may be withdrawn.
• The RBI shall issue the final certificate of Authorisation after receipt of satisfactory SAR and net-worth certificate. Entities granted final authorisation shall commence business within 6 months from the grant of Certificate failing which the authorisation shall lapse automatically. However, entity may request for extension subject to a maximum period of 6 months.
• The Certificate of Authorisation shall be valid for 5 years unless otherwise specified and shall be subject to review including cancellation of Certificate of Authorisation.
• Application for renewal of authorisation shall be filed atleast 3 months before the expiry of validity of Certificate of Authorisation, failing which RBI reserves the right to decline the request for renewal.
• Any proposed major change, such as changes in product features / process, structure or operation of the payment system, etc. shall be communicated to the RBI with complete details. RBI shall endeavor to reply within 15 business days after receipt of above communication.
• In case of any takeover or acquisition of control or change in management of a non-bank entity shall be communicated to RBI within 15 days with complete details. RBI shall examine the ‘fit and proper’ status of the management and, if required, may place suitable restrictions on such changes.

5. What are the Safeguards issued by RBI

Huge funds are involved in PPIs and a number of transactions are carried out in a day through PPIs. Therefore, there is a possibility of using these funds for various illegal transaction such as Money Laundary practises, Terrorism funding etc. Therefore, RBI has implemented following protections:

1. All the guidelines for KYC (Know your customer), Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) issued by Department of Banking Regulations (DBR) shall apply to all entities issuing PPIs and their agents.
2. Provisions of Prevention of Money Laundering Act, 2020 are also applicable to all PPI issuers. All entities shall implement necessary systems to ensure compliance with these guidelines.
3. PPI issuers shall maintain a log of all the transactions undertaken using the PPIs for at least 10 years and such data shall be made available for scrutiny to RBI or any other agency / agencies as may be advised by RBI. The PPI issuers shall also file Suspicious Transaction Reports (STRs) to Financial Intelligence Unit-India (FIU-IND).

6. Know Your Customer (“KYC”) and conditions for issuance of Semi-Closed PPIs

While issuing PPIs, Banking or non-banking issuer shall gather certain KYC information about PPI holders to ensure security. Norms for KYC are the same for both banking and non-banking issuers.  Different sets of information are required to be gathered based on the value of PPIs.

a. PPIs upto INR 10,000

1. Bank and non-bank Issuers shall be permitted to issue PPIs upto INR 10,000 only after collecting following minimum information:
   • mobile number verified with One Time Password(OTP),
   • self-declaration of name; and 
   • Unique identification number of any of the ‘officially valid document

2. These PPIs shall be reloadable in nature. Maximum amount of INR 10,000 can be reloaded during a month and the total reloading amount during the financial year shall not exceed Rs.1,00,000/-.
3. The amount outstanding at any point of time in such PPIs shall not exceed Rs.10,000/-
4. The total debit from such PPIs shall not exceed INR 10,000 in any month.
5. These PPIs shall be used only for purchase of goods and services. Funds transfer to Bank accounts and other PPIs holders shall not be permitted.
6. No separate limit is provided based on the nature of purchase of goods and services. PPI holder may spent anywhere within the overall PPI limit.
7. These PPIs shall be converted into KYC compliant semi-closed PPIs within 24 months from the date of issue of PPI, failing which no further credit shall be allowed in such PPIs. However, the PPI holder shall be allowed to use the balance available in the PPI.
8. PPI issuers shall ensure that this category of PPI is not issued to the same user in future using the same mobile number and same minimum details.
9. PPI issuers shall have an option to close the PPI at any time and balance remaining in PPI Account at the time of closure shall be transferred to the ‘own bank account of the PPI holder’ (duly verified by the Issuer), after complying with KYC requirements of the PPI holder. PPI issuers can also transfer the funds ‘back to source’ (payment source from where the PPI was loaded) at the time of closure.
10. The features of such PPIs shall be clearly communicated to the PPI holder by SMS / e-mail / post or by any other means at the time of issuance of the PPI / before the first loading of funds.

b. PPIs upto INR 1,00,000

1. Bank and non-bank Issuers shall issue these PPIs after after completing KYC of the PPI holder (as indicated in paragraph 6).
2. The amount outstanding in these PPIs shall not exceed Rs.1,00,000/- at any point of time.
3. Funds in these PPI Accounts can be used for Purchase of goods or service or transfer to any bank account or other PPI Account.
4. PPI issuers shall have the facility to add “beneficiaries’ by providing their bank account details. 
5. In case of such pre-registered beneficiaries, PPI issuer can transfer the funds within the limit set. However, such limit shall not exceed Rs.1,00,000/- per month per beneficiary.
6. The funds transfer limits for all other cases shall be restricted to Rs.10,000/- per month.
7. PPI issuers shall clearly indicate these limits to the PPI holders and also provide necessary options to PPI holders to set their own fund transfer limits.
8. In case of closure, balance in PPI Account shall be transferred to pre-designated bank account or other PPIs of same issuer (or other issuers as and when permitted).

c. PPIs upto Rs. 10,000/- with loading only from bank account

(inserted vide circular DPSS.CO.PD.No.1198/02.14.006/2019-20 dated December 24, 2019)

1. Such PPIs shall be issued by bank and non-bank PPI Issuers after obtaining following minimum details of the PPI holder:
   • Mobile number verified with OTP;
   • A self-declaration of name; and 
   • unique identity number of any ‘mandatory document’ or ‘officially valid document’ 
2. These PPIs are reloadable and the reloading amount shall not exceed INR 10000 in a month and INR 1,20,000 during a year.
3. The amount outstanding at any point of time in such PPIs shall not exceed Rs.10,000.
4. These PPIs shall be used only for purchase of goods and services and not for funds transfer.
5. At the time of closure, balance funds shall be transferred ‘back to source’.

7. Validity and Redemption of PPIs

1. All PPIs issued in the country shall have a minimum validity period of 1 year from the date of last loading/reloading in the PPI. 
2. However, PPI issuers can issue PPIs with a longer validity. In case the PPI is issued in the form of card (with validity period mentioned on the card), then the customer shall have the option to seek replacement of the card.
3. PPI issuers shall intimate about expiry of PPI instrument at reasonable intervals, during the 45 days’ period prior to expiry of the PPI.
4. In case of expiry or closing of a PPI Account and no claim is made for balance lying in PPI account at the time of closure, in that case, Non-bank PPI issuers cannot transfer the such balance to their Profit & Loss account for at least 3 years from the expiry date of PPI. In case the PPI holder approaches the PPI issuer for refund of such amount, at any time after the expiry date of PPI, then the same shall be paid to the PPI holder in a bank account.
5. PPIs with no financial transaction for a consecutive period of 1 year shall be made inactive by the PPI issuers after sending a notice to the PPI holder. These can be reactivated only after validation and applicable due diligence. These PPIs shall be reported to RBI separately.

8. Deployment of money collected by PPI Issuer

Banking or non-banking companies issuing PPIs have funds of PPI holders with them and it highly important to keep these funds secure. Therefore, RBI has specified the manner of deployment of money collected by PPI Issuers.

a. Bank PPI issuer

For the schemes operated by banks, the outstanding balance shall form part of the ‘net demand and time liabilities’ for the purpose of maintenance of reserve requirements. This position will be computed on the basis of the balances appearing in the books of the bank as on the date of reporting.

b. Non-Bank PPI Issuer

Non-bank PPI issuers are required to maintain their outstanding balance in an escrow account with any scheduled commercial bank. Company may maintain an additional escrow account with a different scheduled commercial bank.Maintenance of escrow balance shall be subject to the following conditions:-

• The balance in escrow account shall not, at the end of the day, be lower than the value of outstanding PPIs and payments due to merchants. 
• As far as possible, PPI issuers shall ensure immediate credit of funds to escrow on issue, load/reload of PPIs. However, under no circumstance such credit shall be later than the close of business day (the day on which the PPI has been issued, loaded / reloaded). This requirement shall be montined by PPI issuer on a daily basis and any shortfall shall be reported to the Regional Office of DPSS, RBI immediately.
• Only the following debits and credits shall be permitted in the escrow account:

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 bank towards settlement obligations from participation in interoperable payment systems, as permitted by RBI from time to time.
• 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.

9. Mechanism for Customer Grievance Redressal

At the time of issuance, all entities issuing PPI to users must clearly define all terms, conditions, and usage. On the other hand, at the same time, disputes are bound to arise which leads to a number of complaints that need a redressal mechanism. This is why customers’ complaints should be handled in an effective manner by the entities.

Customers should have access to the following services provided by the entities:

• Toll-free number or customer service hotline
• Validity
• Brochure of terms and conditions
• The website’s URL
• Charges information