Author- Senorita Shelton, Rizvi Law College
ABSTRACT
Innovative financial products like the Buy Now, Pay Later (BNPL) mechanism have been made possible by the growing dominance of digital platforms in consumer markets. Although this approach offers users convenience and flexibility, it also raises critical concerns within the Indian legal landscape. BNPL arrangements operates in a changing and sometime unclear context, with problems from contractual inconsistencies and lack of regulatory monitoring to consumer data exploitation and transparency difficulties. This article delves into the fundamental legal challenges associated with BNPL services in India, drawing on statutory laws and case law interpretations.
INTRODUCTION
Buy Now Pay Later (BNPL) is a form of consumer credit that gained popularity in recent years, particularly among the younger generations. With BNPL customers can buy goods or services now and pay for them over a certain length of time in installments, without incurring interest or other costs. The growth of BNPL has had a significant impact on the economy in India, as it has increased consumer spending and provided a new source of credit for consumers. Furthermore, BNPL has given retailers a new start of income and contributed to the creation of new job to create new jobs. However, it has also raised worries about the rise in consumer debt, and the possibility of misuse or exploitation by dishonest lenders.
The BNPL industry is growing increasingly competitive as a result of the large number of new companies entering the market and competing for customers. With an anticipated Compound Annual Growth Rate (CAGR) of 12.2% from 2023 to 2028, the Buy Now Pay Later industry has gained popularity as an alternative for traditional credit for small-ticket transactions. However, the absence of regulation for BNPL services in India has drawn criticisms especially in the light of exorbitant fees and interest rates and fees charged by some providers and the possibility that customers might fall into debt traps. Consequently, the RBI has declared that it is has formed a working group for examining how digital lending platforms, including BNPL services should be regulated and to research the problems and difficulties in the digital lending industry and offer recommendations for suitable regulation. Since the Reserve Bank of India (RBI) has imposed restrictions on credit-based BNPL models and mandated a shift toward Prepaid Payment Instrument (PPI)-based systems, regulatory and systemic issues still exist
LEGAL JARGON
India’s Consumer protection laws are not as comprehensive as those in the United States. However, given that only 22 companies are registered as NBFC-P2P, the online lending sector is mainly unregulated in terms of consumer protection.
1.Rule 5(3) of the Consumer Protection (E-Commerce) Rules, 2020 – Consumers frequently move forward without full understanding the applicable interest, hidden fees, late payment charges, or auto-debit authorizations. The Rule 5(3) of the Consumer Protection (E-Commerce) Rules, 2020, which requires full pricing disclosure in digital transactions is violated n=by thus.
2.The Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 – Many BNPL applications gather sensitive data than required for payment processing including location, SMS records, and contacts. Such invasive data practices breach. Personal information is collected, used and stored in accordance with The Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011. In this case the privacy of the consumer is at stake and constitutional Right to Privacy is a core fundamental right under Article 21.
3.Section 10 of the Indian Contract Act, 1872 – Customers often accept “click-wrap” agreements embedded with BNPL terms without reading. Such methods undermine the principle of informed consent as required by Section 10 of the Indian Contract Act, 1872. Under this section a contract requires the parties free and informed consent in order to be enforceable. Consumers may not be giving their lawful consent when BNPL terms like interest rates, penalty clauses or payback periods are hidden in fine text or behind hyperlink, even though they may theoretically agree This undermines the principle of consensus ad idem.
4.Section 2(1)(r) of the Consumer Protection Act, 2019 – Several platforms include clauses that give them the authority to change repayment terms at any time, to amend repayment terms, impose high penalties, or auto-debit accounts without prior authorization. According Section 2(1)(r) of the Consumer Protection Act, 2019, which defines and prohibits unfair trade practices these actions might be deemed exploitative. Financial hardships and a decline in digital credit systems can result from automatic deductions without meaningful permission, especially when they are veiled as a “default recovery mechanism”. Such clauses may be struck down by consumer courts as void for being unconscionable or lacking mutual assent particularly when embedded within click-wrap or shrink-wrap contracts.
THE PROOF
After receiving multiple complaints against service providers and apps, the RBI first learned about the issues and formed a working committee. In response to the recommendations of group, the RBI published the Report on Digital Lending. In august 2021 The RBI released the Master Directions on Prepaid Payment Instruments (PPIs) which delineated the scope and rules for organisations providing BNPL arrangements and other Prepaid Payment Instruments (PPI) services. Direction 7.5 from the Master Directions lists the acceptable ways to load and reload money PPIs, with a focus on compliance with Indian currency (INR) and forbidding the loading of PPIs with credit lines.
In June 2022, the RBI announced a regulatory stance against credit-based BNPL models by clarifying that the current framework does not allow the loading of PPIs with credit limits. Market titans like Slice Pay temporarily ceased operation as a result of this shift, which compelled BNPL providers to pivot a user prepaid instrument model as opposed to the true BNPL model. Through the September 2022 guidelines, the RBI also addressed the First Loss Default Guarantee (FLDG) partnership model, which restricts loan underwriting to only regulated entities like Banks, Non-Banking Financial Companies, and Credit Information Companies (RE) rather than the BNPL provider themselves.
As it currently stands, the consumer is in a considerably better position now as contrasted to the situation prior to the 2022 Directions. There are benefits even though shifting the BNPL system to a PPI-based system may not fully align with the consumer’s best interest, there are improvements The mandatory disclosure of information such as the Annual Percentage Rate (APR), recovery mechanisms, Grievance Redressal Officers designated by the REs (who can resolve disputes with LSPs) including the cooling off period are key measures. Transparency is improved by these modifications which are described in the Loans. This guarantees that users are informed about the relevant annual interest rates.
CASE LAWS
1.Sahara India Real Estate Corp. Ltd. v. SEBI, (2012) 1 S0CC 603
The Sahara vs SEBI case is crucial in India’s corporate and regulatory landscape. In situations involving corporate and share market irregularities it is a landmark judgment that safeguards the interests and financial well-being of investors. This case concerns the exploitation of legal loopholes and resolves a number of legal issues pertaining to the issuance of securities by unlisted companies. Sahara had raised a significant amount of public money without getting SEBI’s approval by issuing optional fully convertible debentures. According to the Supreme Court, any financial transaction involving public funds that does not have regulatory approval is illegal and dishonest. Given that certain platforms have loaded funds or given credit through Prepaid Payment Instruments (PPIs) without the required NBFC partnerships or RBI permission, this ruling is especially pertinent in the context of BNPLs.
2.Paytm Payments Bank Ltd. & Others v. RBI, 2022
This case raised concerns about the extent of the RBI’s authority over digital-first financial institutions as Paytm contested regulatory constraints placed on its operations. The situation draws attention to the RBI’s control over digital finance companies, reaffirmed that central regulation applies to fintech platforms that handle public funds, questioned the unbridled power of fintech platforms and upheld the necessity of measures to stop the misuse of credit instruments and consumer data. This is particularly pertinent to Buy Now, Pay Later (BNPL) models, which frequently use unapproved PPIs, offer loans without NBFC agreements, or use data in ways that do not have customer authorization.
CONCLUSION
Undoubtedly, BNPL has transformed how people spend their money and shop, especially in the digital economy that has emerged since the pandemic. However, the current legal and regulatory framework in India is inadequate to address the complex risks it presents. It encourages financial accessibility, but also exposes users to credit damage, legal ambiguity, and opaque practices. The absence of clarity in terms and conditions as well as the possibility of potential fraud, theft, or consumer harassment are serious concerns. Legislation should compel BNPL providers to give customers cleat terms and conditions, eliminating any hidden fees or deceptive tactics. Furthermore, stringent data protection regulations must also be put in place to safeguard consumers personal and financial data, reducing the possibility of risk of data breaches and identity theft. A proactive and comprehensive legislative approach, coupled with rigorous enforcement and initiatives to promote digital literacy are essential to guarantee that BNPL evolves into a fair, transparent, and sustainable credit model for the future.
FAQ’s
1.Is BNPL legally permissible in India?
Yes, but it currently functions in a semi-regulated space. Although the RBI has started to impose restrictions, but a comprehensive law is still lacking.
2. Can BNPL platforms report user data to credit bureaus?
Credit bureaus can only receive reports from registered financial institutions with informed customer consent.
3.What happens if you miss a BNPL payment?
Late fees may apply, and your credit score could be negatively affected. Certain platforms may initiate legal or recovery proceedings.
4.Are BNPL and credit cards the same?
No. BNPL is a short-term deferred payment mechanism that frequently has less stringent regulatory constraints than credit cards, which include revolving credit with bank oversight.
