Buy-Now-Pay-Later (BNPL) in India, and its regulatory considerations

Authors: : Aditya Iyer (Lawyer, Financial Services), Anushka Sharma (MPP candidate, NLSIU).

Editorial Note: “Buy Now, Pay Later” is reportedly changing the way consumers around the world spend and presents an attractive business model for entities seeking to enter this sector. Merchants benefit from expanded sales and a widened consumer base, while consumers benefit from the thrill of instant purchases, with “deferred payments and no added cost”.¹

However, it has both in the past and in recent news, been the subject of regulatory dissatisfaction. The present concerns are that entities (particularly, non-banks) offering BNPL are operating a “payment system” without authorisation. Hence, it also becomes necessary to examine at what stage in the process flow the offering becomes a “payment system” necessitating the associated compliances and approvals.

In this explainer, we aim to give readers a holistic flavour of the business model in India and the associated regulatory concerns (particularly in light of recent news). It is, of course, by no means legal advice, and entities engaged in this business are advised to get the specifics of their product arrangement vetted by legal professionals.

- Aditya Iyer

I. Essence & Economics of BNPL 

The Deferred Payments model, more commonly known as “buy-now-pay-later” (BNPL), refers to a facility that allows customers to purchase goods at check-out and make the payment through multiple installments. There are multiple models extant in the market, with a common one being the “zero-interest” facility. 

For instance, the customer wishes to purchase a shirt for ₹1000, and rather than paying the amount upfront, is given the option to pay ₹100 at checkout, and pay the remaining ₹900 over three equated interest-free installments of ₹300 each. 

BNPL, specifically in its zero-interest variation, is also typically driven by merchant-subvention arrangements between a given merchant (i.e., the “seller”) and a funding financial institution. In the aforesaid arrangement, at the time of a customer making a purchase through BNPL, the funding institution may pay the merchant a discounted amount, and collect from the customer the full price of the product, the differential value being the “interest” component earned by the lender.

To illustrate:  The customer, via an e-commerce platform, places an order for a shirt worth ₹1000, and upon placing the purchase order, the funding entity transfers the discounted amount of ₹900 to the merchant, who then makes the product available to the customer. The customer, however, pays the funder the full ₹1000 split over equated installments, such that the funder’s “gain” in the transaction is 1000 - 900, i.e., ₹100.

The customer remains unperturbed as in either case their outgoing expense remains identical, hence, insofar as they are concerned, it is zero-interest (note, however, as in reality it may not actually be zero-interest, lenders may need to ensure the appropriate disclosures in loan documents and Key-Fact-Statement are made).

The past and present lives of BNPL

In its former avatar, entities offering BNPL would structure it as a revolving line of credit available to the consumer for their purchases. The consumer would utilise this line of credit to make a purchase, repay within the required timeline, and have the line be available to them again. The original model was primarily designed to “solve for” payment convenience. However, due to the regulator’s discomfort with non-banks offering revolving lines (which, amongst several other reasons, was because it was perceived as a roundabout way of operating credit cards without the requisite license), and the restrictions on Prepaid Payment Instruments (PPIs) loaded through credit lines, this model has been largely discontinued. 

Today, the model has two popular variations: the first offered by banks is a credit line on UPI, and the second by Non-Banking Financial Companies (NBFCs) is to structure each payment facilitated for the customer through BNPL as a discrete term loan, with its own loan-documentation and due-diligences, but with faster processing (say, through expedited KYC), to avoid customer drop-offs. The present regulatory concerns pertain more so to the second variation offered by the NBFCs 

II. What is fuelling BNPL growth in India? 

The BNPL sector in India has seen dramatic growth over the last few years, which may be attributable to the growing consumer demand and digital infrastructure that makes such facilities possible. The market is currently valued between USD 21–31 billion in 2025, with varying projections but consistent double-digit CAGR (estimated at over 20% for each year)². BNPL growth is driven by several factors, such as relatively low credit card penetration, rising digital adoption, and a young, tech-savvy population. 

Note:  According to the RBI, the number of credit cards in India rose to 10.80 crores in December 2024, almost doubling from 2019³. However, according to reports, only 5-6% of the adult population of the country actually own credit cards. Hence, its usership still remains relatively limited, and has been affected and reshaped by fintech innovations and the growth of digital payments and lending systems. 

As per certain estimates, by 2030, the BNPL market in India is projected to be valued at around USD 78.50 billion. The following factors likely drive this growth: 

• Demographics and Consumer Behaviour: A large young population with budget constraints and a need for flexible payment options. Ease of use of BNPL helps users overcome the accessibility-related limitations posed by credit cards.
• Expansion of E-commerce: Embedded finance, wherein financial services are seamlessly integrated into non-financial platforms, allows for synergies between credit institutions and e-commerce platforms. For instance, by tying up with lenders, e-commerce platforms, including giants like Amazon and Flipkart, offer the customer credit options at checkout, such as their BNPL options. The facility also allows for the financial inclusion of individuals and MSMEs who may have otherwise been excluded from financial services⁵.
• Digitisation and market regulation: The UPI-enabled digital payments system in India, with its integration and wide acceptance, has enabled BNPL platforms to successfully tap into payment processes. Using means like collaborations with UPI-based apps, partnering with e-commerce platforms, and embedding their credit options at the checkout stage, in both online and offline platforms, BPNL platforms are increasingly a part of regular payments and lending.
• Expansion of Regulatory Frameworks: A clear regulatory regime on digital lending and payment activities gives private actors more incentive to undertake research and investment into BNPL (as there is an element of predictability regarding what can be done and cannot be done). The regulatory regime also helps repose consumers’ confidence in the facility.

III. How is BNPL marketed as an alternative to credit cards? – Consumer & Regulatory perspectives.

From the standpoint of the consumer, BNPL emerges as an attractive (but limited) alternative to credit cards in the following ways:

1. Eligibility criteria: The facility is made available even to consumers who do not meet the stringent eligibility criteria for credit cards, such as the specific parameters pertaining to: credit history requirements, occupation, income, etc. Hence, it allows for a wider proliferation of consumer credit. 
   
   Regulatory note: Of course, there are two sides to every coin. The more lenient eligibility criteria also mean that BNPL customers are riskier, and hence, lenders may consider the heightened risk profile of the customers while setting their sectoral limits for consumer credit (see also Para 32B of the SBR Directions for NBFCs, and Para 31.9 of IRACP Master Circular for Banks). The heightened risk profile of these customers has already been studied in some jurisdictions, such as the United States, where it was found that “BNPL users in the United States are more highly indebted and have lower credit scores than non-users”⁶. Further, insofar as the product is a digital lending product, an economic assessment of the borrower, even if lenient, should nevertheless be conducted.
2. Interest-free credit: Unlike credit cards, where users may be charged interest on the purchase amount, many BNPL providers (particularly non-banks) offer zero-interest options. 
   
   Regulatory note: Although it may appear to be zero-interest, the lender would likely be earning some interest over the disbursed amounts in the form of the difference between the subvented disbursement and the repayment by the customer (after all, few things in life are free). Hence, lenders may need to disclose the actual amounts disbursed in the Key-Fact-Statement, and calculate the Annualised Percentage Rate on the same. The RBI, in its circular on pernicious practices followed by Banks, has also stated, “If there is a discount offered in the price of a product, the loan amount sanctioned for the purchase should be after taking into account the discount, rather than giving effect to the benefit by reducing the RoI.” Although this relates to “Banks”, it may also be adhered to by NBFC lenders pari materia. 
3. Consumer’s credit score: Due to some market practices, where lenders do not report the BNPL consumers to the credit institutions, there is a perception that BNPL does not affect the consumer’s credit score (thus, the consumer receives the “rewards” of obtaining credit, without the “risk” of an impaired credit score). 
   
   Regulatory note: However, given that this facility is, in most cases, nothing but another form of credit, intuitively, one would opine that lenders offering BNPL should nevertheless undertake credit-reporting. The fact that the facility is often marketed as a “payments offering” does not change its inherent nature (refer also to Para 6(1)(a) of the Credit Information Reporting Directions).

IV. Specific regulatory concerns around the role of BNPL fintechs in the process flow

Recently, there have emerged some specific regulatory concerns around the role of BNPL fintechs in the process flow, specifically, concerning their undertaking of on-lending without a license, and operating a payment system without authorisation. To understand this, one needs to consider the flow of funds.

The outward flow of funds: Principal Business Test concerns

In the process flow, there would usually be an outward flow of funds to the merchant/beneficiary, resulting in the product being made available to the customer. To facilitate the outflow of funds, BNPL fintechs may either partner with certain licensed lenders in the capacity of a “lending service provider” or undertake on-lending using their own funds (in case they are a licensed lender). 

Lending without obtaining an NBFC license may not be sustainable, because the credit extended for the purposes of consumer durables/purchases made by the customer may qualify as consumer credit, and in any case, as a financial asset, and income received from such credit would be considered as financial income. When more than 50% of the entity’s assets are financial assets, and more than 50% of gross income is income from the financial assets, the entity’s “principal business” may be considered by the regulator to be non-banking finance. In such cases, conducting business without obtaining an NBFC license would likely attract regulatory scrutiny and may also attract penalties.

Note: This concern only assumes relevance where the credit is not extended by the seller themselves (for instance, a mobile shop allowing its customers to purchase its phones on credit, and perhaps charging some interest for the delayed repayments).

Inward flow of funds (i.e., collections): Payment System concerns

After the outward flow, there would also arise an inward flow of funds, consisting of repayments made by the customer. Here, the fintech would likely have a role in facilitating the collections. In collecting the funds, the fintech may have two options: either collect the funds directly or engage a payment aggregator for collections.

Collecting and settling funds directly, where such payments do not pertain to the fintech’s own services / it is not acting as a collections agent, would only be permissible if the entity is authorised to operate a payment system under the Payment and Settlement Systems Act, 2007 (PSS Act).

In case funds are being collected and settled for third-party services without a Payment Aggregator license, it may be construed as a violation of the PSS Act.

V. Concluding notes

Thus, behind this seemingly simple facility is a maze of compliance that the concerned entities would need to navigate. We hope readers have found this explainer on BNPL and key regulatory considerations beneficial.

References

1. Bank for International Settlements, ‘Buy now, pay later: a cross-country analysis’, available at: https://www.bis.org/publ/qtrpdf/r_qt2312e.htm, last accessed in October 2025.
2. Mordor Intelligence, ‘India Buy Now Pay Later Services Market Size & Report Analysis, 2030,’ available at https://www.mordorintelligence.com/industry-reports/india-buy-now-pay-later-services-market, last accessed in October 2025
3. Mint, ‘Credit cards surge over 100% in 5 years, debit cards stay steady—Key lessons for card users’ available at:https://www.livemint.com/money/personal-finance/credit-cards-surge-over-100-in-5-years-debit-cards-stay-steady-key-lessons-for-card-users-rbi-11738144679891.html 
4.  The Global Economy, ‘Percentage of people with Credit card in India’, available at https://www.theglobaleconomy.com/India/people_with_credit_cards. 
5. World Bank Blogs, ‘How embedded finance is reshaping credit access for MSMEs and individuals: Implications for credit information systems,’ available at https://blogs.worldbank.org/en/psd/how-embedded-finance-is-reshaping-credit-access-for-msmes-and-in, last accessed in October, 2025.
6. Bank for International Settlements, ‘Buy now, pay later: a cross-country analysis’, available at: https://www.bis.org/publ/qtrpdf/r_qt2312e.htm, last accessed in October 2025.