He stated that innovations like Buy Now Pay Later (BNPL) and credit card spending facilitate immediate consumption and reduce savings of the younger generation.

In particular, he highlighted the problem of mounting household debt and the risk of easily accessible credit escalating the problem. An important observation was the need for central bankers and policymakers to evolve their approaches: shifting from conventional macroeconomic models to adopting new tools and analysis mechanisms.

The issue needs to be contextualised in the broader framework of the present. Household debt, at 39.1 per cent of GDP, is a headache for the RBI. This comes as a corollary to rising inflation and low household income-led low demand that have been a nagging concern for some years now.

In such a scenario, the main concern in household debts is rising consumption credit, especially unsecured credits like BNPL. The bigger stakes here are on the impact of fintech and the effective control of the central bank as the regulator in the presence of financial services operating outside the formal banking mechanism.

Fintech And 'Banking The Unbanked'

The emergence of fintech was to bridge the gap left by the formal banking sector. ‘Banking the unbanked’ has been the mantra of all fintech innovations. The RBI in India has played a phenomenal role in nurturing a vibrant fintech ecosystem by being pioneers in adopting digital banking or allowing digital PPI (prepaid payment instruments).

Today, Scheduled Commercial Banks (SCBs) in India are active practitioners of digital banking, leveraging the nationwide Digital Payment Interface (DPI) or collaboration with fintech solution providers.

According to the RBI, NBFCs and fintech firms account for 70 per cent of lending to individuals aged 35 and below, with fintech lending expected to surpass traditional bank lending by 2030. One of the biggest fintech interventions has been in credit services.

Fintech has the unique ability to harness advanced algorithms and big data analytics to assess creditworthiness and digital distribution to offer quick, hassle-free loans to retail consumer segments. This bridges the credit gap unaddressed by the conventional banking sector.

Most fintech services leverage other platforms, particularly e-commerce platforms, for their operations. This practice, often referred to as embedded financial services, involves tying up fintech service providers with an e-commerce platform to offer credit to consumers at the point of purchase.

This allows for a symbiotic relationship between the platforms and the fintech service providers when it comes to new customer acquisition. Easy credit facilities help e-commerce platforms in attracting more customers. The customers the e-commerce platforms attract become customers for the fintech service provider with low operational expenses for loan approval and disbursement, as compared to conventional lending channels.

Banks, NBFCs, as well as other entities, participate in India’s digital lending ecosystem as lenders. Lenders provide both secured and unsecured loans through these platforms, which are either publicly or privately owned. Loan origination and management services are also integrated in this ecosystem.

For customers, the services are offered in the form of either standard EMI or low-cost EMI. These EMIs are offered mainly through three channels — co-branded credit cards, credit and debit cards issued by banks and the BNPL.

It must be noted that credit via cards (debit or credit) is channelised through conventional SCBs via formal payment platforms (VISA or Mastercard) with proper risk assessment and monitoring. An individual needs to have a formal bank account and certain credit ratings (with due KYC norms) to have these instruments.

BNPL is the dark horse in which credit is offered to customers even if they do not have any of the formal credit instruments.

How BNPL Became Popular

It is this ease and deeper outreach that makes BNPL such a popular option for users. However, these factors also make it worrisome for regulators. The main concern is not quantifying the total debt (that is easily done via corporate reporting) but about tracking its repayment, and more importantly default rates.

If one does multiple transactions under a credit card (say, from different platforms), every transaction is linked and traced to one account or individual under strict credit review. For BNPL loans, all transactions will be recorded as multiple accounts, and cannot be traced to a single account.

This implies that there is presently no means to ascertain indebtedness or ability to repay such debts by the borrowers.

Therefore, it is not surprising that BNPL is already worrying regulators across the world. US customers, for instance, are lapping up BNPL, with a quarter of Americans surveyed stating that they availed BNPL. Given its astounding growth rate of 1,100 per cent during 2019-2021, economists and regulators in the US are already talking about this ‘phantom debt’.

In this 'phantom debt' case, debt exists but exact quantification of debt is still unclear. The US clearly remembers the 2008 sub-prime crisis and is justifiably worried. But other countries too are wary of the risk posed by BNPL.

Australia, which has one of the highest adoptions of BNPL with nearly half of the population between the ages of 18 and 39 using such services, is already taking regulatory measures. The concerns stem from the fact that in 2018-19, 21 per cent of BNPL users missed a repayment, resulting in over US$ 43 million in fees, a 38 per cent increase compared to the previous financial year.

BNPL-related debt grew eightfold between 2017 and 2021, with 84 per cent of financial counselling practitioners reporting that clients attempted to manage existing BNPL debt by opening new accounts. This prompted regulatory change that recognises BNPL as credit with BNPL service providers, and now credit checks have to be run on borrowers to meet responsible lending requirements.

Don't Throw The Baby With The Bathwater

In India, BNPL is a fairly new evolving service category and India is presently ranked fifth in terms of BNPL in e-commerce. Even though actual penetration levels are pretty low, its growth potential is huge.

While there are around 60 million credit card users in India, there are around 250 million e-commerce customers. And this number is steadily growing with deeper penetration of e-commerce platforms. BNPL was estimated to be worth between US$ 3 billion and US$ 3.5 billion (about Rs 22,500-26,250 crore) around February 2024. Experts think it will grow to US$ 45-50 billion (Rs 3.37-3.75 lakh crore) by 2026.

The bigger question is how India should address BNPL. It would be ironic to treat BNPL as a threat simply because it is playing out its true objective, providing banking services to the unbanked. However, certain degrees of transparency and monitoring are required to prevent misuse or abuse of these services.

The most effective way to proceed is to properly identify the risks associated with BNPL and how much of it can be attributed to such services. For example, BNPL services should not be blamed for driving conspicuous consumption or impulse buying. BNPL is at best a result and not the root of today's hyper-consumerist society.

BNPL should not be deemed risky for generating bad loans by giving credit to so-called 'undeserving' individuals. It is akin to saying the unbanked do not deserve to be banked. But more importantly, it should be remembered that services like BNPL are mere tools for consumer convenience and a critical component of the larger digital integration of the economy.