The full form of PPI in banking is Prepaid Payment Instrument. PPIs are financial instruments that facilitate the purchase of goods and services, financial services, and remittance facilities against the value stored within them. They have become integral to India’s digital payment ecosystem, offering a convenient alternative to cash transactions.

Types of PPIs

The Reserve Bank of India (RBI) classifies PPIs into three categories:

  1. Closed System PPIs: Issued by entities for purchasing goods and services exclusively from that entity. These instruments do not permit cash withdrawals or payments to third parties and are not classified as payment systems requiring RBI approval.
  2. Semi-Closed System PPIs: These PPIs can be used at a group of clearly identified merchant locations or establishments that have specific contracts with the issuer to accept them as payment instruments. They do not permit cash withdrawal or redemption by the holder.
  3. Open System PPIs: Issued by banks, these instruments can be used for purchasing goods and services, transferring funds, and withdrawing cash at ATMs or point-of-sale terminals. They offer the most flexibility among PPIs.

Issuers of PPIs

Both banks and non-bank entities can issue PPIs. Banks require RBI approval to issue PPIs, while non-bank entities must be incorporated in India under the Companies Act, 1956 or 2013, and obtain authorization from the RBI to operate a payment system for issuing PPIs.

Usage and Benefits

PPIs have gained popularity due to their convenience and ease of use. They are commonly used for online shopping, bill payments, ticket bookings, and peer-to-peer money transfers. PPIs reduce the need for carrying cash, enhance transaction speed, and promote financial inclusion by bringing more individuals into the digital payment ecosystem.

Regulatory Framework

The RBI regulates PPIs under the Payment and Settlement Systems Act, 2007. The regulatory framework ensures the safety, security, and efficiency of payment systems in India. PPI issuers must adhere to guidelines related to KYC (Know Your Customer), anti-money laundering (AML), and combating the financing of terrorism (CFT) to maintain the integrity of the payment system.