RBI Proposes New Rules for Prepaid Payment Instruments

The Reserve Bank of India (RBI) has introduced a draft framework to govern prepaid payment instruments (PPIs), seeking to update the existing regulations and establish a more robust structure for banks, fintech startups, and wallet operators.

Referred to as the draft Master Direction on Prepaid Payment Instruments (PPIs), 2026, these proposed guidelines are intended to supersede the 2021 master directions. The RBI said the draft rules are designed to foster a supportive environment for the sustained expansion of PPIs and to bolster the security of transactions conducted through these instruments. The framework, which broadens the scope of PPI applications such as UPI-linked wallets for international visitors, will be subject to public feedback until May 22.

The draft rules define PPIs as payment tools where funds are loaded to facilitate subsequent transactions. These instruments encompass digital wallets, prepaid cards, and smart cards used for storing money for digital transactions. The proposed rules delineate PPIs into General Purpose and Special Purpose instruments. General Purpose instruments are further categorized into Full-KYC PPIs and Small PPIs.

Full-KYC PPIs are issued after thorough customer verification, adhering to know your customer (KYC) standards. These PPIs have a minimum validity of one year, with the total outstanding amount and monthly debits capped at ₹2 Lakhs. Peer-to-peer (P2P) transfers from these PPIs are limited to ₹25,000 per month, while cash loading is restricted to ₹10,000 per month.

Small PPIs, intended for situations where complete customer due diligence is not feasible, can be issued with minimal customer details. These PPIs have a maximum validity of two years and must be upgraded to full-KYC PPIs within this period. The outstanding amount for Small PPIs cannot exceed ₹10,000, and monthly debits are also capped at ₹10,000. Cash withdrawal and P2P transfers are not allowed from Small PPIs.

Special purpose PPIs are divided into three categories: gift PPIs, transit PPIs, and PPIs for foreign nationals and Non-Resident Indians (NRIs) visiting India. Gift PPIs have a maximum value of ₹10,000 and cannot be purchased with cash, with a validity of one year from issuance. Transit PPIs, issued without KYC verification, have perpetual validity but limit the outstanding amount to ₹3,000, with no withdrawals, refunds, or transfers permitted.

PPIs for foreign nationals and NRIs, powered by UPI One World, require physical verification of passport and visa. This enables P2M payments during their stay in India, with monthly debits not exceeding ₹5 Lakhs.

Under the proposed regulations, banks authorized to issue debit cards can issue PPIs with prior notification to the RBI. Non-bank issuers must seek authorization from the RBI and meet specific net-worth criteria, including a minimum of ₹5 Cr at the application stage and ₹15 Cr by the end of the third financial year.

The draft norms also emphasize KYC compliance for non-bank issuers, encouraging the conversion of Small PPIs into full-KYC PPIs. Additionally, the RBI has tightened oversight of escrow accounts, requiring non-bank issuers to maintain PPI funds in separate accounts with scheduled commercial banks, used exclusively for authorized PPI business and subject to quarterly audits.

The proposed rules prohibit cross-border use of PPIs and the payment of interest on PPI balances, and they disallow the issuance of PPIs in paper voucher form. The draft also permits PPI issuers to engage in co-branding arrangements, limiting the role of co-branding partners to marketing and distribution activities, while the PPI issuer remains liable for all actions of the co-branding partner.

To enhance interoperability, the new guidelines reiterate that wallet operators ensure interoperability with card networks and UPI. The draft also facilitates PPI discovery on third-party UPI apps, integrating PPIs into the broader digital payments ecosystem.

Regarding customer protection, the draft rules mandate clear disclosure of all charges, validity periods, and terms in simple language. Platforms must also establish a public grievance redressal framework, appoint a nodal officer, and define an escalation matrix.

This development follows the RBI’s recent rollout of a new e-mandate framework to standardize rules for recurring transactions across digital payment systems. The ‘Digital Payments – E-mandate Framework, 2026’ specifies that no charges can be levied on customers for using the e-mandate facility.

The new framework standardizes e-mandates and aims to improve alerting, consent handling, dispute support, and compliance workflows. Customers using e-mandates must complete a one-time registration via additional factor authentication (AFA), which is also required for any withdrawal or modification of an existing mandate.

Transactions can be processed without AFA up to ₹15,000 per transaction for general recurring payments, while insurance premiums, mutual fund subscriptions, and credit card bills are permitted without AFA up to ₹1 Lakh per transaction. Issuers must send notifications to customers at least 24 hours before each debit and after every successful debit, including details for grievance redressal. Acquirers are responsible for ensuring that onboarded merchants comply with the framework.