by Amol Kulkarni and Renuka Sane.
Regulatory interventions often function as de-facto industrial policy, by favouring certain business models over others, effectively picking winners and losers. In this article we present an episode in recent Indian history where regulatory decisions of the Reserve Bank of India on prepaid payment instruments (PPI) significantly influenced competition and product evolution. PPIs are instruments that facilitate the purchase of goods and services, financial services, remittance facilities, etc., against the value stored therein (RBI, 2021). They saw a phenomenal growth of more than 100 times in volumes and more than 25 times in value between September 2012 and November 2024 when volumes had reached 584.78 million and the value Rs. 192.14 billion (RBI, PSI). By this time, the Unified Payments Interface (UPI) volumes and value were more than 25 times and 100 times that of PPI volumes and value. The data suggests that something happened between October 2016 and September 2018, which put the brakes on the PPI growth story and shifted the momentum towards UPI.
UPI enables transfer of funds directly between bank accounts, and does not require parking of funds in non-interest bearing accounts like PPIs. Some may argue that UPI was a superior product that led to reduced interest in PPIs. However, for others, the need to park and transact with only a limited amount in a PPI, ring fences them from larger amounts in a bank account reducing their total risk exposure. Nonbank transaction accounts can also improve access to digital payments for unbanked households (Toh, 2023). The argument that UPI winning over PPIs because the former is a better product would have more credibility if, during the specified period (Ocotber 2016 - September 2018):
- There were no regulatory interventions that adversely affected PPI operations,
- Regulations did not favour UPI,
- Exits of private players from the PPI space were dispersed as more players realised the futility of competing with UPI.
The article argues that this was not the case, and there is reason to believe that the policy and regulatory environment during this period contributed to the slowdown in the PPI growth trajectory, particularly those of non-bank PPIs, and favoured UPI.
The build-up of the PPI market
On 8 November 2016, the Government of India withdrew the legal tender status of Rs. 500 and Rs. 1000 denomination of banknotes issued by the RBI till that date (RBI, 2016). Such large-scale demonetisation gave a fillip for the demand of digital payments. Consequently, the volume of PPI transactions shot up from 127 million in October 2016 to 261 million by December 2016 and steadily rose to around 340 million by March 2017. The value of PPI transactions also surpassed Rs. 100 billion during this period (RBI, PSI). In the months following demonetisation, around 10 entities, all non-banks, received permission from the RBI to issue and operate PPIs (RBI, 2025). The number of non-bank PPI issuers increased from 37 to 55, and surpassed bank PPI issuers for the first (and only) time in this period (RBI, AR).
The draft PPI Master Directions: March 2017
A few months after demonetisation, on 20 March 2017, the RBI issued draft Master Directions on Issuance and Operations of PPIs in India for public comments (RBI, 2017). One of the stated objectives of the draft Master Directions was to encourage innovation in the segment in a prudent manner, taking into account safety and security along with customer protection and convenience.
By this time, three types of PPIs were regulated: semi closed PPIs with minimum KYC, semi closed PPIs with full KYC, and open PPIs. The key difference between semi-closed and open PPIs was that the former could be used to purchase goods and services at specific or clearly identified merchant locations, while the latter could be used for purchase of goods and services at any card accepting merchant location. Cash withdrawal was not permitted through semi-closed PPIs but allowed through open PPIs.
The draft Master Directions proposed two important changes:
- Increase in the capital and networth requirements: Before the draft, PPI operators were required to maintain a minimum positive net worth of Rs. 1 crore at all times, along with a minimum paid up capital of Rs. 5 crores (RBI, 2016).
- Limits on monthly fund transfers: Earlier there were no limits on monthly fund transfers. The 2017 draft directions proposed restrictions on the minimum amount outstanding at any point of time, the maximum amount that could be loaded on to a wallet in a month, and the amount that could be transfered out in a month.
Some key proposals of the 2017 draft directions were:
All figures in Indian Rupees
| Issue | Semi closed PPIs with minimum KYC | Semi closed PPIs with full KYC | Open system PPIs |
|---|---|---|---|
| Minimum positive net worth to be maintained at all times | 25 crores | 25 crores | 25 crores |
| Amount outstanding at any point of time | 20,000 | 1,00,000 | 1,00,000 |
| Maximum amount that can be loaded during any month | 20,000 | Cash loading limit: 50,000 | Cash loading limit: 50,000 |
| Monthly fund transfer limit | 10,000 | For pre registered beneficiary: 1,00,000 For other cases: 10,000 | For pre registered beneficiary: 1,00,000 For other cases: 10,000 |
There was pushback from stakeholders on the proposals of the draft Master Directions (IGIDR, 2017; CUTS, 2017; IFMR, 2017; NASSCOM-DSCI, 2017). For instance, the Finance Research Group (FRG) at IGIDR called out disproportionate proposals around capital requirements, and transaction limits on consumers, and suggested rolling them back. Specifically, with respect to transaction limits, the FRG pointed out:
The intention for imposing transaction limits and restricting consumers from transacting with their own money is unclear. Every payment system in an economy is susceptible to fraud. However, we do not impose limits on the use of payment systems to pre-empt frauds. For example, the susceptibility of credit card transactions to frauds does not lead us to impose limits on individual credit card transactions. On the contrary, imposing transaction limits on consumers is contrary to their interests.
The final PPI master directions: October 2017
In October 2017, the RBI issued Master Direction on Issuance and Operation of PPIs, after examining comments and feedback received on draft directions (RBI, 2017A). Some key provisions of the Master Directions were:
All figures in Indian Rupees
| Issue | Semi-closed PPIs with minimum KYC | Semi closed PPIs with full KYC | Open system PPIs |
|---|---|---|---|
| Minimum positive net worth at the time of application | 5 crores | 5 crores | 5 crores |
| Minimum positive net worth by the end of third financial year of receiving final authorisation | 15 crores | 15 crores | 15 crores |
| Amount outstanding at any point of time | 10,000 | 1,00,000 | 1,00,000 |
| Maximum amount that could be loaded during any month | 10,000 | Cash loading limit: 50,000 | Cash loading limit: 50,000 |
| Cap on amount that could be loaded during a financial year | 1,00,000 | ||
| Monthly fund transfer limit | 10,000 | For preregistered beneficiary: 1,00,000 For other cases: 10,000 | For preregistered beneficiary: 1,00,000 For other cases: 10,000 |
The Master Directions had reduced networth requirements from Rs 25 crore proposed in the draft to Rs 15 crore. However, additional restrictions were imposed on transaction limits. For instance, the maximum amount which could be loaded during any month in a semi closed PPI with minimum KYC was reduced from Rs. 20,000 to Rs. 10,000. In addition, a new limit on maximum amount that could be loaded in a semi-closed PPI with minimum KYC during a financial year of Rs. 1,00,000 was included in the final directions. It is important to note that this had not found mention in the original draft proposal that was circulated for comments.
This effectively meant that the average amount that could be loaded in a semi-closed PPI with minimum KYC on a monthly basis was Rs. 8,333. Alternatively, for 10 months during a financial year, Rs. 10,000 could be loaded in a semi-closed PPI with minimum KYC every month, but for the next two months, no amount could be loaded, to comply with the annual limits. Coversations with stakeholders suggest that such restrictions potentially frustrated recurring payments and auto-debit mandates which rely on minimum balance being available in a wallet. Further, it restricted the use case of PPIs to very narrow set of transactions.
The impact of regulatory changes: the size of transactions
The proposals in both the draft and final Master Directions had an immediate and severe impact on the PPI market. Figure 1 shows the impact on the PPI transaction volumes, and the turning point when UPI overtook PPIs.
Figure 2 shows the impact of Master Directions on the PPI transaction values, and the turning point when UPI overtook PPIs - immediately after these Directions.
However, one must also note that PPI transactions were more than UPI's, for about a year since its launch in May 2016 till about October 2017, when the final master directions on PPIs came into effect. UPI got a fillip due to demonetisation but was still used less than PPIs for several subsequent months. This suggests that PPIs were relevant in a market with UPI.
The impact of regulatory changes: the number and type of players
Figure 3 presents the changes in the number of players in the PPI market. Between March and October 2017, i.e. between the draft and final PPI directions, licenses of seven PPI operators, all of which were non-banks, were cancelled. Of these, four voluntarily surrendered their license, perhaps owing to the restrictive regulatory framework proposed in the draft Master Directions (RBI, 2025). This shows the impact that the draft directions, which also reflected regulator's thinking, had on the the PPI market. Once the directions were finalised, licenses of 20 PPI operators were cancelled by the RBI, all of which were non-banks. Overall, we see that in this period, 16 players voluntarily surrendered their licenses, four ceased operations, five converted themselves to payments banks, and one license was revoked. Further for three years from 2018 to 2020, not a single permission was granted to non-banks for the issuance and operation of PPI (RBI, 2025). Given that licenses were being voluntarily surrendered, one may assume that very few or no fresh applications were received by the RBI. This was also the period during which the government began massively incentivising use of UPI through cashbacks and other schemes (Kulkarni, 2018).
The number of licenses issued went up only in 2021, potentially as a response to the creation of a new category of semi-closed PPI with minimum KYC which could be loaded only through bank accounts.
The regulations led to a shift in the composition of players as well. Earlier, the market saw both bank and non-bank entities offer PPI products. The commercial consequences of the regulatory changes were much larger on non-bank PPIs relative to bank PPIs. Consequently, the number of non-bank PPI operators reduced from 55 in 2016-17 to 36 in 2020-21, while the number of bank PPI operators increased from 54 to 56. In fact, it went upto 62 in 2019-20, possibily indicating the interests that banks retained in offering PPIs, which ideally should have not been the case, if UPI was a superior product. Of the non-bank PPI operators which continue to operate in spite of the regulatory changes in 2017, many are legacy operators enjoying a loyal user base, some are part of larger groups having deep pockets and providing financial or digital services, others have expanded into offerings like digital lending, some offer niche services like foreign exchange, money transfer, and transit payments, while few had to undergo change in management and control.
Further, non-bank issuers have faced more stringent compliance burdens, particularly around KYC norms, fund loading restrictions, and interoperability requirements. For instance, while non-bank PPIs must maintain an escrow account with a partner bank, bank operated PPIs can leverage their own deposit accounts, reducing costs and operational friction. Additionally, regulatory decisions such as restricting credit lines on PPI wallets have disproportionately impacted non-bank issuers, limiting their ability to innovate and compete with banks that can seamlessly integrate PPI-like functionalities within their broader suite of financial services.
RBI's review of its stringent conditions (late 2019-early 2020)
More than two years after the October 2017 Master Directions, the RBI decided to review some of the stringent conditions imposed on the PPI market, particularly those related to loading of PPIs. In December 2019, it decided to create a new category of semi-closed PPI with minimum KYC which could be loaded only through bank accounts. For such PPIs, the amount which could have been loaded through bank accounts during a financial year was increased to Rs. 1,20,000 i.e. Rs. 10,000 per month could be loaded in such PPIs. The RBI recognised that such leeway was necessary to ensure regular bill and merchant payments (RBI, 2019A). For other semi-closed PPIs with minimum KYC, the annual limit of Rs. 1,00,000 for loading was retained. However, this move appeared to be too little too late and perhaps failed to uplift the momentum in PPIs. Consequently, in January 2020, in addition to bank accounts, credit cards were permitted as a mechanism of loading semi-closed PPIs with minimum KYC having an annual loading limit of Rs. 1,20,000. This move, so far, has also failed to push PPI towards previously experienced growth rates.
Conclusion
The analysis of RBI regulation of PPIs over the past decade, changes in PPI volumes, value, and operators during this period, suggests that regulation has indeed impacted market outcomes for PPIs. While the RBI provided some relaxations, these were not enough to push PPIs back into high growth trajectory.
While it is difficult to pinpoint the exact regulatory requirement which might have impacted the PPI market most, it is clear that the restrictions introduced in October 2017 collectively contributed to a significant decline amongst industry's interest in PPIs as payment instruments. This was validated through interactions with key stakeholders as well.
One reckons that the RBI would have introduced such restrictions in the interests of safety and security of the payments market, prevent fraudulent actors from misusing the instrument, and obstruct unreliable entities from issuing and operating PPI instruments. It might not have predicted that the restrictions could have had such adverse consequences of reducing the attractiveness of PPIs as an instrument, and the users and market players, moving away from the PPI market. It is here where robust public consultations, and ex-ante cost benefits analyses can prove useful to estimate the potential impact of regulatory instruments, avoid disproportionate regulation, and ensure balanced market outcomes. While the RBI did invite suggestions on draft directions in March 2017, several new requirements, such as the annual cap on loading semi-closed PPIs with minimum KYC, were directly incorporated in the final directions of October 2017. This prevented stakeholders from providing their inputs on such new requirements.
The RBI should use tools like public consultations more often and thorougly. In any case, frauds and transaction failures are equally possible with UPI, as recent events have shown. In fact, with UPI, the entire bank balance of the customer is at risk, making them more susceptible than PPIs could ever have been.
Some may argue that with the advent of UPI, PPI was bound to lose market share. However, as this article shows, PPI was restricted by regulations, and did not get an opportunity to effectively compete with UPI, which on the other hand was booming on the back of regulatory relaxations, incentives, and zero fee mandates. One must also not forget that it was the non-banks which propelled UPI to unimaginable heights, and non-banks were also behind PPIs initial growth before the regulations hit them badly.
References
CUTS, 2017: Comments on draft Master Directions on issuance and operations of PPIs in India, 2017, https://cuts-ccier.org/pdf/Advocacy-Comments_on_RBI_Master_Direction_on_Issuance_and_Operation_of_PPIs.pdf
IFMR, 2017: Comments on draft Master Directions on issuance and operations of PPIs in India, 2017, https://dvararesearch.com/wp-content/uploads/2024/01/IFMR-Finance-Foundation-Comments-on-the-RBI-Draft-Master-Directions-on-Issuance-and-Operation-of-Prepaid-Payment-Instruments-in-India.pdf
IGIDR, 2017: Finance Research Group, Inputs on draft Master Directions on issuance and operations of PPIs in India, IGIDR, 16 April 2017, https://ifrogs.org/PDF/201703note_inputsToCpOnPpis.pdf
Kulkarni, 2018: Amol Kulkarni, (Not) the way to promote digital payments, CUTS Discussion Paper, February 2018, https://cuts-ccier.org/pdf/DP_the_way_to_promote_digital_payments.pdf
Mukherjee, 2025: Mukherjee, India: UPI enabled for prepaid payment via third-party apps, Coingeek, 7 January 2025, at https://coingeek.com/india-upi-enabled-for-prepaid-payment-via-third-party-apps/
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RBI, 2008: RBI Press Release regarding Inviting Comments on Approach Paper on Guidelines for PPIs dated 7 November 2008, at https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=19419
RBI, 2016: RBI Master Circular dated 1 July 2016 regarding Policy Guidelines on Issuance and Operation of PPIs in India, at https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10510
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RBI, 2017: RBI Draft Master Directions dated 20 March 2017 regarding Issuance and Operations of PPIs in India, at https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3325
RBI, 2017A: RBI Master Direction dated 11 October 2017 (updated as of 17 November 2020) regarding Issuance and Operation of PPIs at https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11142
RBI, 2019: RBI Notification regarding Introduction of a New Type of semi-closed PPIs dated 24 December 2019, at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11766&Mode=0
RBI, 2019A: RBI Press Release regarding Statement on Development and Regulatory Policies dated 6 December 2019, at https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48803
RBI, 2021: RBI Master Directions on PPIs dated 27 August 2021 (updated as on 27 December 2024), at https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12156
RBI, 2024: RBI Notification dated 27 December 2024 regarding UPI access for PPIs through third-party applications, at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12756&Mode=0
RBI, 2024A: RBI Press Release dated 5 April 2024 regarding Statement on Developmental and Regulatory Policies, at https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57639
RBI, 2025: RBI, Approvals/ Certificates of Authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 for Setting up and Operating Payment System in India, 9 January 2025, at https://rbi.org.in/Scripts/PublicationsView.aspx?id=12043
RBI, AR: RBI Annual Reports at https://rbi.org.in/Scripts/AnnualReportMainDisplay.aspx. There was a change in financial year from June to March from 2019-20. Also, data of bank PPI issuers for 2015-16 is not available.
RBI, PSI: RBI Payment System Indicators (monthly) at https://www.rbi.org.in/Scripts/PSIUserView.aspx
Toh, 2023: Ying Lei Toh, How Much Do Nonbank Transaction Accounts Improve Access to Digital Payments for Unbanked Households?, Payment System Research Briefing, 29 November 2023, Federal Reserve Bank of Kansas City, at https://www.kansascityfed.org/Root/documents/9919/PaymentsSystemResearchBriefing23Toh1129.pdf
The authors are researchers at the TrustBridge Rule of Law Foundation.
