Banking

Supertech Insolvency Proceedings Against Debtor

More than 10,000 home buyers have not yet received possession of their hard-earned flats by the Supertech group. This is all you need to know about the whole case. The Supertech Group is a reputed real estate development firm.

Insolvency Proceedings: One of the financial creditors of Suprectech Ltd., Union Bank, filed a petition before the National Company Law Tribunal under Section 7 of the Insolvency and Bankruptcy Code, 2016 to initiate an insolvency resolution proceeding against Supertech. Section 7 gives the power to a financial creditor to initiate insolvency proceedings against the debtor.

In 2013, an alleged loan amount of around 430 crore rupees was taken for the construction of a project, namely Eco Village II in Greater Noida, Uttar Pradesh.

NCLT Decision on The Insolvency Proceedings

NCLT, after examining all the documents submitted by the debtor and financial creditor, came to the conclusion that there was a debt and Supertech Ltd had defaulted. The Court has agreed to initiate the Corporate Insolvency Resolution Proceedings (CIRP) against Supertech Ltd. and appointed Mr. Hitesh Goel as Interim Resolution Professional.

CIRP is a proceeding or a mechanism through which creditors can recover their money. After the proceedings are initiated against the company, it would be examined whether the defaulter would be able to repay the loan or not. If the debtor is unable to repay the loan, then the creditor can file an application to NCLT for liquidation or restructuring of the company.

What Happens When a Company is Declared Insolvent?

When a company is declared insolvent by the court, a moratorium is placed on all the pending civil, consumer, or other cases till a resolution is achieved. In the present case, Supertech is also barred from disposing of its assets in any form.

Usually, after such proceedings, there are chances that the assets of the company are auctioned and a new owner altogether takes over the whole project. So there will definitely be a delay in the construction of the remaining houses and all the other formalities will need some time to be fulfilled. But this would be really painful and frustrating for the buyers who have spent more than 10 years on the projects.

But in the present case, Supertech knocked on the doors of NCLAT and took the matter into their own hands.

Current Status of The Case:

Supertech Ltd. filed an appeal with NCLAT against the order of NCLT. The company contended that reverse CIRP should be allowed in the present case. Now, reverse CIRP is a very new concept and originated in the matter of Umang Realtech. This is a process exclusively for real estate companies that are on the verge of completing their projects but could not do so due to lack of funds and CIRP proceedings.

In this process, a promoter agrees to stay outside the CIRP process but wants to act as a lender by injecting funds or cash flow. To put it simply, another company provides additional funds for the completion of the projects undertaken by a real estate defaulter.

This innovative process helps the homebuyers get early possession of their houses. But it is pertinent to note that the courts have limited this process to just a single project in order to drive the major focus toward that project. This is done to ensure that the asset value maximization remains project-specific. As a result, the company’s assets are not maximized. The project’s assets should be maximized in order to balance the project’s creditors, including allottees, financial institutions, and operational creditors.

In the present case, NCLAT gave the green light to the Reverse CIRP for the project Eco Village II and for all the other projects for which IRP is responsible. The NCLAT ruled that no funds from any account could be withdrawn from the corporate debtor’s other projects without the permission of the IRP.IRP is directed to constitute the COC for just one project, i.e., Project Eco Village II, and claims received in the name of the project must be separated from other projects.

The Reverse CIRP definitely gives an edge to the unsecured financial creditors, i.e., the home buyers, because the financial creditors will not be provided with the assets of the company. The home buyers would be handed possession of the completed project, and the financial creditors could not claim those flats and land.

The process looks quite promising from the theoretical point of view, but it is still under examination. Now the question arises, what if a home buyer does not want possession of the flat but wants their money back? This would be a problem because the reverse insolvency process only allows the completion of a project and provides the possession of flats. The only thing a home buyer can do after receiving their allotment is a request that the in-charge find a suitable buyer for their flats and refund their money.

Analysis

The home buyers are currently worried about their hard-earned money, which they invested in the project. But one should have faith in the process of the law. The NCLAT has established an insolvency process that would help unsecured financial creditors. Unlike the usual insolvency proceedings, real estate insolvency proceedings can now be different, which would help the home buyers over financial creditors (banks).

All a home buyer could do now is wait and trust the legal system.

UPI Credit Cards

UPI is a single platform that brings together a variety of banking services and features into one place. The National Payments Corporation of India (NPCI), in collaboration with the Reserve Bank of India and the Indian Banks Association (IBA), has launched the Unified Payments Interface (UPI).

With the introduction of the Unified Payment Interface (UPI), India has made a significant step toward becoming a cashless economy. You may now use your smartphone as a virtual debit card thanks to a new payment methodology. It has also made instant money sending and receiving possible. The QR code concept has completely eliminated the use of digital wallets.

How Does UPI Work?

Transactions using UPI employ a highly secure encryption format that is difficult to mess with. Every day, the IMPS network of the National Payments Corporation of India (NPCI) processes Rs.8,000 crore in transactions. With the advent of UPI technology, this is projected to skyrocket. Every transaction is verified using a two-factor authentication approach similar to OTP. For validation, however, UPI PIN will be used instead of OTP.

Why is UPI in News Again?

The Reserve Bank of India (RBI) suggested that credit cards be linked to UPI networks on June 8. For the time being, Governor Shaktikanta Das said that the operation will begin with RuPay credit cards. As of now UPI only allows users to make purchases by connecting their debit cards to their savings or checking accounts.

According to RBI Governor Shaktikanta Das, 594.63 crore transactions worth 10.40 lakh crore were overseen using UPI in May 2022 alone. The inability to use credit cards for any purchase has been a key downside of UPI transactions thus far. Until now, clients’ debit cards were only able to be used for transactions if they were linked to their savings or current accounts.

This is a significant step since purchasers will now be able to use UPI transactions to pay using their credit cards. While transactions will initially be limited to RuPay credit cards, other major credit card issuers such as Visa and Mastercard are likely to join in the future.

“This arrangement is expected to provide more avenues and convenience to the customers in making payments through the UPI platform. This facility would be available after the required system development is complete,” the RBI said on June 8.

UPI accounted for more than 60% of all non-cash transactions in FY22, according to a joint study by PhonePe and the Boston Consulting Group. PoS transactions, on the other hand, only made about 5% of all transactions. As a result, it is evident that, if properly implemented, this effort has the potential to greatly improve credit card acceptance and adoption.

Benefits of linking UPI and Credit Cards:

At first, UPI payments could only be processed through bank accounts. Later, UPI applications started allowing users to add debit cards to their accounts and make payments. The ease of usage of UPI makes it popular. Experts believe that the linkage of UPI and credit cards will also be extremely beneficial for small merchants.

Users may now link their credit cards to UPI, enabling further adoption of fast and easy payments for even minor transactions without the necessity of a PoS (Point of Sale), as previously Credit Cards needed PoS machines for payment services that were to be bought by merchants at high prices. Only a few applications and banks have been allowed to use credit limits for UPI transactions. With the most recent statement, the RBI has made the UPI credit facility available to all participants.

Because the feature is being rolled out to RuPay, India’s local payment method, it would be interesting to observe if this offers RuPay a competitive advantage over global competitors like Visa and Mastercard and if this increases RuPay’s market share. Also, while paying with a credit card has advantages such as reward points on your spending and a credit-free period of up to 45 days, it may also draw up to 48 percent annual interest on the outstanding amount if not managed properly.

Challenges:

While this is an intriguing start, there are still a few unsolved questions. Let us see what they are.
Because UPI payments are free, merchants prefer to accept them. However, it is unclear how credit card companies can recoup their capital costs and how the current infrastructure would allow this if credit cards were accepted through UPI Payments. At a press briefing, when asked about pricing, RBI deputy governor T Rabi Sankar said, “How the pricing will work out, that we will have to see as we go forward.”

Credit card transaction revenues (mostly from MDR) account for 30% of overall bank revenue. If banks do not see this as a win-win situation, they cannot be blamed. This might put a part of bank profits at risk in the long term unless the RBI is ready to foot the tab through the Payment Infrastructure Development Fund, just as it is for UPI-dependent merchants.

That’s not all, though. Banks may become subject to revolving credit risk if the number of credit card users increases dramatically because of low-ticket transactions.

Credit cards, furthermore, are a sort of soft loan or short-term debt that must be responsibly managed. Credit rotation and extra debt reinvestment in investing, trading, and other activities are possibilities.
It has the potential to significantly raise UPI volumes and average order amounts, which are far greater in the case of credit cards than UPI, but the simplicity of payments may lead to consumer overspending and a debt trap for many individuals.

A four- or six-digit PIN is required for all UPI transactions, whereas credit cards require a PIN for offline purchases and an OTP for online purchases. Payment authentication is unknown, which might lead to an increase in fraud cases if the necessary infrastructure and standards are not in place.

Conclusion:

Through this suggestion, The RBI’s goal is to increase the digital payments and keep also to clients from falling prey to some of these players’ shady business methods from other third-party applications. It should be emphasized, however, that both UPI and RuPay are now NPCI products, and the RBI is only piloting this initiative with RuPay cards, which account for less than 5% of all credit cards in use. If the pilot is successful, the RBI will need to consider MDR costs and the risk credit risks before moving forward with a full-scale roll-out to other care providers.

Nationalization of Banks in Comparison to Covid Effects

If there are two things that have grabbed the political attention of the masses in India, it has to be the odious covid-19 pandemic that ravaged the already battered economy and the nationalization of the public assets. Public assets, time and again have been a touchy subject for the masses of India.

This is especially is true given the widespread notion or belief that government assets are invariably and emphatically public assets. The government assets have been the talk of the town for two specific reasons.

First is the selling off of the public’s property and heavy corporatization of the banking sector and secondly, the government’s close relations with the Ambani-Adani. With outrage pouring in from the masses the idea has become a contentious issue of debate.

Government’s inspiration

1. But what exactly inspired the government’s decision for disinvestment in the economy? The answer to the question lies in the arrival of the pandemic which severely affected and crippled the finances of the government.
2. With the need for robust public finance and expenditure in the economy, lower expenditure and finances spelled trouble for the battered economy. Thus, in order to finance the needs of the economy, the government innovatively thought of disinvestment of the public assets on which it could cash on.
3. But is disinvestment such a bad though Afterall? It is to be noted that privatization might actually ramp up the efficiency of the asset which had been reductant under the government’s rule. With higher NPAs in the public banking sector, the introduction of healthy competition can lead to the revamping of the banking sector. What more pertinent reason for such a disinvestment spree can be?
4. 
5. Given, the circumstances of the pandemic which the banking sector weathered, NPAs were reported to surge. Mortarium on payments and easy lending had put immense pressure on the banking sector.
6. Though many banks did reduce their NPA ratio, that was merely due to the act of writing off of the loans from the financial books. As a matter of fact, RBI’s Financial Stability Report of 2020 effectively and emphatically foresaw a huge surge in the Gross NPA ratio of the banking sector.
7. This was projected to be at a significant 13.5 percent for the month of September for the financial year 2021. The NPAs were projected to heavily surge from 7.5 percent in September 2020.
8. What made the Indian banking industry suffer the wrath of the covid more than the other countries was due to India’s despicable legacy of bad debt even before the COVID-19.
9. 
10. Thus, one can strongly argue that as the odious variants of the virus despicably assailed the country which had pervasive and floundering health sector, the already battered pre-pandemic financial infrastructure, cracked and worsened
11. The aforementioned situation is even more exacerbated for the public sector, which is inefficient even under normal circumstances.
12. Thus, the government’s solemn decision to privatize certain banks and cash on them has some merit to it. With increased efficiency and losses, one can effectively expect the better performance of the sector in the economy which is in the nascent stage of recovery.
13. However, taking an ill view of the banking sector too can be a biased opinion. With strict, increased monitoring, the immense increase in market capitalization in the stock market, and the introduction of stimulus packages, there is hope that green shoots for the sector and the economy are a possibility.
14. This can be effectively corroborated by the fact that throughout 2020-21, SCBs’ RoE and RoA sustained a positive rise of an impressive 6% in March 2021 on their CRAR.
15. 
16. In fact, the GNPA and NNPA ratios too displayed signs of stability over a period of time, which spells good for the economy. As aforementioned, last year, the moratorium on compound interest, which was sanctioned by the RBI, had a despicable effect on the bank’s finances.
17. But it is to be noted that contrary to the earlier inferences, banks are now much better equipped to manage profitability.
18. Their resilience in terms of higher recoveries and as higher capital buffers too has been improved. Thus, one can maintain that the moratorium and the pandemic did have a silver lining for the banking sector.
19. Thus, in totality, disinvestment, which has been a petulant topic for the public, can be a step in the right direction for the industry. Given the immense importance of the banking sector in the economy, which drives the demand and the investment, its timely resolution is the need of the hour.
20. If this required extreme means, one should brace themselves for the inevitable. Thus, one should not be much abrasive or unappreciative of the scheme the government is concocting for the banking sector. As for the future, one can only be patient to witness what the scheme will offer for the industry and how will impact the economy in the long run.

Tightening the screws: what the RBI’s new PCA framework means for large NBFCs

RBI and PCA are on their newer pursuit of correcting the discrepancies in the Indian financial sector. Only now, RBI is after the NBFCs in the financial sector which are usually overlooked and underappreciated. The last prompt corrective action initiated by the RBI was against the cooperative banks in the financial year 2002.

In the financial year 2021, we will effectively witness India’s central bank releasing a comprehensive prompt corrective action framework for the non-banking finance companies with the aim to strategically align the regulation governing the country’s shadow lenders with that of the commercial banks.

It is to be noted that according to the RBI, the new framework will come into effect from October 1, 2022.
Having mentioned, that the last prompt corrective action was taken in the financial year 2002, what has led the RBI to initiate another this time around?

The prime reason for the same is the burgeoning importance of the NBFCs as a legitimate source of funds that has garnered prominence and popularity markedly in the Indian financial ecosystem.

Given the arduous nature of bank loans that consumers encounter, several shadow lenders have managed to entice people into its gambit of lending leading to faster expansion of operations in the financing world. One can also state that it has been also possible due to the lower regulatory constraints than were imposed on the NBFCs, which made lending a profitable and easy business.

Another reason for a successful model of NBC’s lending is also the fact that NBFCs also take on riskier loans compared to Commercial banks which make them tantalizing enough for the borrowers. Thus, one can strongly state that banks adverse nature towards risky borrowers has led to its slow burial as a lender in the financing world.

Additionally, it is to be noted that it is emphatically and strategically no longer uncommon for NBFCs to tie up with banks and effectively engage in practices of co-lending.

This model works upon the framework where two entities lend collaboratively based on pre-determined disbursement ratios. Here, it is worthy of mentioning that such ratios usually encounter NBFCs often lending the smaller proportion of a loan.

This leads to a humungous exposure of banks to high risk which consequently is much less appreciated and unwarranted for its financial health. Thus, given the aforementioned arguments, one can conjure that the NBFCs have been expanding at a warp rate in the economy.

So much so, that its collaboration on risker loans with banks is indirectly also affecting the financial health and balance sheets of the banking sector. Given, the already battered and odious condition of the banking sector, such discrepancies need to be rectified.

Though all the aforementioned warnings seem risker enough, these don’t even come close to NBFCs’ latest love affair with the digital lending platforms. Lately, according to an interesting turn of events, NBFCs have also established partnerships with digital lenders in the market.

This can be seen as tapping into the pool of unstable lenders in the market, which at best can be described as the genesis of financial problems in the banking and financial sector in India. Digital lending platforms are usually incapable of lending on their own, this is due to their regulatory constraints. Thus, given its regulatory and financial curtailments, such lending platforms usually enable NBFCs to effectively expand their borrower bases beyond physical channels.

Thus, given the immensely burgeoning inter-connectedness of NBFCs within the financial ecosystem in India, the central bank is duly seeking to reduce risky behaviors in the economy.

This is also the need of the hour due to the fact that India is still struggling with the handling of the pandemic, and any financial fallout will spell doom for the economy. Thus, to emphatically ensure that India’s shadow lenders’ balance sheets remain strongly resilient, we will witness the initiation of prompt corrective action against them.

Given the elaborate discussion of the inherent faulty nature of the NBFC’s; lending system what has prompted the RBI to go after the NBFCs in the middle of the pandemic? it is to be noted that lending risks in the NBFC sector were made abundantly clear in recent years.

This has been due to the collapse of Dewan Housing Finance Ltd, IL&FS, Anil Ambani controlled Reliance Capital, and Srei Group. one cannot deny the fact that the collapse of one NBFC leads to a ripple effect on the economy, thus such contagion effects need to be curtailed before they infect the wider ecosystem.

Talking about the PCA mandate, it has been put in place by the RBI “to further strengthen the supervisory tools” that are increasingly relevant to the NBFC sector. According to the RBI, the NBFC’s financial health will be monitored on three bases asset quality, capital, and leverage. Thus, certain specific thresholds have been laid by the apex bank, which if NBFC breaches, will lead to the initiation of action against it.

Based on the immediate and specific nature and severity of the breach, the RBI will suitably force the NBFC to halt their certain expansions, limit the disbursal of loans to certain risky lenders, suspend their dividend distribution or raise capital or expedite recoveries. Quite evidently, the RBI might also seek to merge two entities as a resolution, if the financial health comes across as too risky.

As far as NBFCs go compared to commercial banks, the reasons to worry are meager as the majority of mid or large NBFCs have comfortable capitalization levels. For those, that might have risker balance sheets, plenty of time has been provided to strengthen their balance sheets. Thus, when it comes to NBFCs odds of any major corrective action are way less compared to the commercial banks.

Suspension of Labor laws During Covid 19 Pandemic

In its pursuit to provide impetus to the faltering and battered economy, in Covid, several States in India had effectively brought about an ordinance to exempt compliance from certain labor laws amidst the pandemic. Such suspension was brought about to emphatically provide more flexibility to employers and businesses.

This flexibility was provided in order to help curb the effects of the Covid – 19 induced lockdowns that had weighed heavily on the industries and businesses. It is to be noted that labor codes or laws significantly provide much-needed social security measures for workers. Though one might argue that these measures effectively assist in boosting the economy, concerns regarding the protection of the rights of the Indian labor force, too surface which need to be paid attention to.

In a series of events, the state of UP was seen promulgating the ordinance namely the ‘Uttar Pradesh Temporary Exemption from Certain Labour Laws Ordinance, 2020’. This particular ordinance had effectively led to the exemption from compliance to the majority of the labor law in India for an extensive period of three years.

Similar steps were also seen to be taken by other states which had positively issued notifications to grant certain exemptions under the factories act of 1948 and Industrial Disputes Act of 1947. This period had also seen an extension in working hours for a period of exhaustive three months.

As aforementioned, UP saw the biggest suspension of adherence to the labor law in India, which was made possible through the suspension of the majority of the key labor law in India and rules in the states. But it is to be strongly noted that not all labor laws were suspended during the unprecedented times.

Barring certain provisions relating to security and safety of workers under the Factories Act, 1948 child labor, the Building, and Other Construction Workers, Maternity Benefit Act, equal remuneration act, Employee’s Compensation Act, and the Bonded Labour System (Abolition) Act, 1976; all other laws were suspended in the State.

Thus, given the nature of the laws that were exempt from being suspended, it can effectively see that even amongst the chaos and mayhem in the economy, the health and the welfare of the workers were not forgotten or taken for granted.

With the crippled financial standing of the urban and rural workers, protection of the rights and welfare of the labor class should be a top priority for the government, which, one can argue, is committed to.

But given the aforementioned description of suspension of certain labor law in India, this gives rise to an inquisitive query, will not the suspension of laws for the welfare of the labor affect the wellbeing of the workers in the state? It is to be noted that the suspension of laws comes with certain requirements and rules that need to be adhered to.

For example, businesses and industries are stringently required to keep the record of the workers including all the details like names and other intimate details of all employed workers shall. This shall be done electronically on the attendance register, such as prescribed in Section 62 of the Factories Act, 1948.

On the other hand, the industries have been strictly instructed to pay workers fairly, where no one will be paid less than minimum wage as prescribed by the UP Government.

In fact, to maintain the availability of funds to the workers through the harrowing times of the Covid 19, the wages of the workers shall be effective within the time frame limit that has been prescribed under Section 5 of the Payment of Wages Act, 1936.

One might even state that the government has taken staunch and solemn steps for digital inclusivity by stating that the wages to the workers will be paid only in their bank accounts.

On the other hand, as aforementioned, the safety and the security of the workers will be intact as the provisions under the Factories Act, 1948 and the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act of 1996 which strongly relate to safety and security of workers, will remain applicable.

Thus, to rest the debate about the compromise of the welfare of the workers, the government has given serious thought to the repercussions and effects of the ordinance that it has promulgated.

Given the harrowing, odious toll on health that the pandemic has initiated, the government has made it stringently mandatory that the workers shall not be allowed or required to work for more than eleven hours per day.

Thus, in totality, the Ordinance by the state governments had made the key labor law in India strongly relating to workers and those concerning the industrial dispute, trade unions, occupational safety, contract workers, etc. defunct for a considerable period of time.

The rationale behind the suspension of laws has been that it is a pertinent need of the hour. This is increasingly needed in order to give concessions to ongoing and new industrial businesses, establishments and factories.

Though this certain move heavily tries to revive the economy through the revival of businesses and industries, it cannot be denied that it has attracted widespread criticism on the ground that the promulgation of the Ordinance leads to infringing of the rights of the workers.

What remains now is to be seen and scrutinized is how the reality of the implementation of such laws plays out in the economy. It will also be interesting to witness whether such an ordinance will be challenged in the Indian courts. Since the precedent has been set, it can be anticipated that other States are likely to follow in a similar direction to suspend/relax labor law in India in order to attract investment.

New RBI Norms For Asset Classification may Increase NBFC’s Bad Loan Pile

As per the new RBI norms, in a turn of dramatic events, the bad loans of India can be acerbated to an excruciating degree. According to the reports, non-banking financial companies (NBFCs) may witness the rise of bad loans after March 2022. This mainly comes after the Reserve Bank of India recently clarified an up-gradation of non-performing assets.

The Case Of RBI and NBFC’s

According to the recent recommendations, the Central bank has come forward with the agenda that the loan accounts that are classified as NPAs may be upgraded to ‘standard’ assets.

Though, it is to be noted here that it will be only if the entire interest and principal are paid by the borrower.

Also, according to the notification, this will also apply to both banks and NBFCs. It is worthy of mentioning here that most of the NBFCs use to upgrade gross stage-3 loans to gross stage-2 loans.

Thus, one can emphatically state that the rule that has been pronounced on the up-gradation of bad loans will certainly lead to a rise in NPAs reported by some NBFCs.

On the other hand, it is no news that ambiguity in the banking sector leading to inefficiency is a persistent matter, and the latest announcement aggravates just that.

One can effectively argue that there could be some ambiguity with regard to the classification of such accounts that strategically are part of the dues that may have been cleared.

The crux of the new legislation states that NPAs currently classified as stage-2 but now could be classified as stage 3 NPAs also.

Therefore, as a matter of fact, this could lead to an increase in provisioning against such accounts.

NBFCs in India follow the Ind-AS guidelines, under which delinquent loans are classified as gross stage-1 (loans overdue by up to 30 days), gross stage-2 (loans overdue between 31 and 89 days), and gross stage-3 (loans overdue for over 90 days).

There is no categorization of standard and non-performing loans for NBFCs under this system.

In a report on Monday, Kotak Institutional Equities (KIE) said as market practice, all NBFCs have preferred to have a uniform definition for non-performing loans and gross stage-3 or 90 days past due (dpd) loans.

“However, NBFCs may choose to have parallel reporting under Ind-AS and regulatory filings to RBI. Our preliminary discussion with market participants suggests that NBFCs may not go for parallel reporting and continue the current practice (uniform definition for non-performing loans and gross stage-3).

Hence, gross stage-3 loans will likely increase,” KIE said.
Some analysts are of the view that while bad loans may rise, the regulatory clarification may not have a significant impact on provisioning.

Prakash Agarwal, director and head – financial institutions, India Ratings, and Research, said non-banks will report higher NPAs, especially in small-ticket unsecured loan asset classes. “However this is unlikely to have a significant impact on the provisions for the NBFCs and hence P&L (profit and loss) may not get impacted much,” he said.

On the other hand, Agarwal expects that the co-lending market could get a push from the new norms on asset classification.

“This would give a fillip to co- lending as the norms of banks and NBFCs will be aligned. This was one of the important issues that were a cause of challenge for co-lending,” he said.

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Digital Lending Apps or UPI Platforms in India

UPI platforms in India or digital lending apps may be a burgeoning business in the economy and is turning out to be a boon for financial inclusion. But given the haze concerning the regulations and its increasing popularity amongst the masses, it has become a regulatory bane for UPI .

With the rates of fraudulent apps on the rise targeting the innocent masses, the Reserve Bank of India is still increasingly finding it difficult to effectively weed out the fraudulent loan apps from the plethora of financial apps out there.

What makes it more difficult is the craze around the burgeoning BNPL sector which is attracting borrowers. The immense ease of borrowing that is being offered via Unified Payments Interface, is causing havoc in the economy with customers being lured by fraudulent apps.

It is to be noted that the customers are being offered credit instantly by just scanning a QR code. What more? The fraudulent apps are offering ridiculously easy credit at no or minimal interest. Thus, one can quite fathom the approachability of loan borrowing through UPI platforms in India and RBI’s Delima to counter such discrepancy.

While, as it has been established that the facility has been fast gaining acceptance, one can emphatically maintain that UPI credit is actually operating in a regulatory grey area. This is due to the significant fact that UPI is a product that is not allowed by the regulator i.e. there are no regulations regulating the ominous digital lending business.

but then how is UPI functioning with no regulations by the authorities? UPI is essentially a digital lending arrangement between a non-banking financial company and a fintech firm. It can also be a relationship between a firm and a bank, or any other regulated entity.

It is worthy of mentioning here that the fintech firm effectively acts as a sourcing agent. Thus, it merely acts as a front-end for customers, while the actual task of lending is undertaken from the balance sheet of the regulated lenders.

It is to be noted that UPI is managed by the National Payments Corporation of India. This effectively is an umbrella entity that has been set up by the apex bank to enable a digital payments system in India.

In 2018, according to the UPI 2.0 that was launched, platforms were allowed to be linked to overdraft accounts. This meant that credit through UPI was emphatically not allowed unless a customer avails of an overdraft facility. This facility was to be availed on the current bank account or savings account which was linked to the UPI.

But, quite interestingly, if the situation and functioning of most fintech firms are to be scrutinized, it can be seen that these firms offer UPI credit as a service that does not have any such specific, aforementioned requirements for customers. Though many senior executives allege and emphasize the fact that specifically offering UPI credit through an overdraft facility is not a serious compulsion, one cannot make sense of the ambiguity that looms large on the lending sector.

According to the reports, it has also been observed that not many customers, necessarily had opted for linking their bank accounts with an overdraft facility. This is merely due to the fact that the individuals who effectively and conveniently opt for short-term loans online, actually find it arduous to avail themselves through an overdraft facility.

But why is it so? It is emphatically due to a pertinent fact that the customers are stringently required by banks to pledge their overdraft loan against collateral. Moreover, given the fact that UPI services are being availed mostly by the new-to-credit accounts with low balances, they may not even get approval for an overdraft facility.

Thus, given the fact that such requirement of linking the UPI ids to an overdraft account, one can argue that this can potentially lead to slower growth for fintech firms that significantly and effectively offer easy credit in the economy to the new to credit and low on balance customers.

Though, given the alternate credit systems in India, including the credit card, UPI seems to be efficiently appreciable and easy to use. But encountering the unregulated status of the same, concerns about data protection surface. With easy money and low interest, far from the scrutiny of the banks and authority, the UPI system seems quite enticing.

But with high chances of misuse of personal information, the system is damned to fail and perish. For easy comprehension of the law and regulation, the RBI will have to clear the air around the issue of linkage of the accounts.

This view gains all the more traction due to the growing appeal of the UPI platforms in India due to its exemplary services. Where a plastic credit card might arrive in 15-20 working days at a customer’s doorstep, the customer can use a UPI credit line within 15 minutes to avail of the services.

Thus, in totality given India’s ascendence towards the UPI system and digital banking, stringent and stricter laws are required to monitor the same. With the increasing population falling in for the enticement of the easy scheme, the regulatory authorities need to step in to protect consumer interest through the enactment of effective data protection laws.

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