Abstract
The increasing dominance of digital platforms in consumer markets has paved the way for innovative financial products like the Buy Now, Pay Later (BNPL) mechanism. While this model provides ease and flexibility to customers, it also raises critical concerns within the Indian legal landscape. From contractual inconsistencies and lack of regulatory oversight to consumer data misuse and transparency issues, BNPL arrangements operate in an evolving and somewhat ambiguous legal environment. This article delves into the fundamental legal challenges associated with BNPL services in India, drawing on statutory laws, case law interpretations, and global comparisons to recommend a more robust regulatory response.
Introduction
Buy Now, Pay Later (BNPL) schemes have revolutionized consumer spending, especially among tech-savvy youth in urban India. These services allow buyers to acquire goods or services instantly while deferring payment over time, usually without any immediate interest burden. Companies such as LazyPay, ZestMoney, Simpl, and major e-commerce platforms like Flipkart and Amazon have integrated BNPL features into their checkout processes.
However, beneath the convenience lies a legal vacuum. BNPL, though similar in function to traditional credit, often evades the rigorous compliance required of formal lending institutions. This has triggered legal scrutiny surrounding enforceability of terms, customer rights, regulatory approval, and financial disclosures. The issue becomes more pressing considering India’s digital finance landscape is growing faster than its regulatory mechanisms can adapt.
I. Legal Classification of BNPL Transactions
Although marketed as a frictionless purchasing solution, BNPL arrangements amount to deferred credit and may fall within the purview of various Indian laws:
1. RBI Act, 1934: If BNPL providers issue credit, they may be deemed to function as Non-Banking Financial Companies (NBFCs), requiring registration and compliance.
2. Indian Contract Act, 1872: BNPL arrangements involve legally binding promises to pay later, and hence constitute enforceable contracts.
3. Consumer Protection Act, 2019: These schemes influence consumer rights and can be challenged for unfair trade practices if they include ambiguous or predatory clauses.
Legal Conundrum: Are BNPL services just commercial tools or disguised loans?
Though many platforms claim otherwise, most BNPL products offer short-term credit. This functional resemblance to lending invokes the jurisdiction of financial regulators and necessitates clear legal classification.
II. Contractual Issues
1. Ambiguity in User Agreements
BNPL terms are often embedded within “click-wrap” agreements that customers accept without reading. Such methods undermine the principle of informed consent as required by Section 10 of the Indian Contract Act, 1872.
2. Unfair Contract Terms
Several platforms insert clauses allowing them to unilaterally amend repayment terms, impose high penalties, or auto-debit accounts without prior consent. These practices may be considered exploitative under:
Section 2(1)(r) of the Consumer Protection Act, 2019, which defines and prohibits unfair trade practices.
The Doctrine of Unconscionable Contracts, as affirmed in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (AIR 1986 SC 1571), which held that extremely one-sided contracts can be declared void.
III. Regulatory Gaps
1. Reserve Bank of India’s Intervention
For years, BNPL providers operated without direct supervision. However, in June 2022, the RBI issued a circular that banned non-bank entities from loading credit onto prepaid payment instruments (PPIs). This move severely impacted several BNPL firms and highlighted the lack of robust compliance.
Reference: Circular No. DOR.CRE.REC.No.74/21.06.007/2021-22
The RBI raised red flags regarding absence of Know Your Customer (KYC) norms, lack of transparency in credit approval, and deficient risk evaluation procedures.
2. NBFC Licensing Requirement
BNPL firms that disburse credit without NBFC authorization potentially violate the RBI Act, 1934. This opens them up to regulatory action and also leaves consumers vulnerable due to the absence of regulatory safeguards typical in formal lending.
IV. Consumer Protection Challenges
1. Lack of Transparency in Pricing
Consumers often proceed without full awareness of applicable interest, hidden fees, late payment charges, or auto-debit authorizations. This violates Rule 5(3) of the Consumer Protection (E-Commerce) Rules, 2020, which mandates complete pricing disclosure in digital transactions.
2. Privacy and Data Misuse
Many BNPL applications collect sensitive data—location, SMS records, and contacts—far beyond what is necessary for processing payments. Such intrusive data practices breach:
The Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011, which govern the collection, use, and storage of personal information.
The constitutional Right to Privacy, upheld in Justice K.S. Puttaswamy v. Union of India [(2017) 10 SCC 1], which emphasized that informational privacy is a core fundamental right under Article 21.
V. Impact on Credit Health and Financial Behaviour
Most users are unaware that missing even a single BNPL installment can damage their credit profile. Non-payment may result in:
Negative entries in CIBIL or Equifax reports.
Debt accumulation due to revolving defaults and penalty interest.
Unauthorized sharing of credit behavior with third parties, sometimes without proper user consent.
This raises significant concerns about informed usage and whether BNPL schemes indirectly promote reckless borrowing.
VI. Legal Precedents and Judicial Guidance
1. Sahara India Real Estate Corp. Ltd. v. SEBI, (2012) 10 SCC 603
The Supreme Court held that any financial arrangement involving public money without regulatory clearance is unlawful and deceptive.
2. LIC of India v. Consumer Education & Research Centre, AIR 1995 SC 1811
The Court recognized that unjust and one-sided terms in financial instruments can be challenged under consumer rights laws.
3. Paytm Payments Bank Ltd. & Others v. RBI, 2022
This case emphasized the need for regulatory intervention in digital finance models and questioned the unchecked authority of fintech platforms.
VII. International Models of Regulation
Australia
BNPL platforms are subject to the National Consumer Credit Protection Act, which mandates fee disclosures and affordability checks.
United States
The Consumer Financial Protection Bureau (CFPB) initiated investigations in 2021 to examine risks associated with overborrowing, lack of transparency, and data misuse by BNPL operators.
VIII. Recommendations and the Road Ahead
1. Formal Classification under RBI Norms
BNPL must be officially recognized as a credit product. This would subject it to NBFC registration, capital adequacy norms, and disclosure standards.
2. Unified Digital Credit Law
India should consider introducing a dedicated legal framework to govern all online lending services, including BNPL, payday loans, and microcredit.
3. Mandatory Credit Checks and KYC
Stringent creditworthiness assessments must be mandatory before granting BNPL limits, ensuring borrowers do not overextend financially.
4. Uniform Contract Standards
All platforms should provide standardized and simplified contracts mentioning:
Payment schedules
Charges on defaults
Impact on credit scores
5. Data Governance Audits
Personal data collected should be strictly relevant to credit operations. Consent must be informed, revocable, and limited in scope.
IX. Conclusion
BNPL has undoubtedly transformed how people shop and manage money, especially in the post-pandemic digital economy. However, the current legal and regulatory framework in India is inadequate to address the complex risks it presents. While it promotes financial accessibility, it simultaneously exposes users to opaque practices, legal uncertainty, and potential credit harm.
A proactive and comprehensive legislative approach, coupled with strict enforcement and digital literacy efforts, is essential to ensure that BNPL evolves into a fair, transparent, and sustainable credit model for the future.
FAQs
Q1: Is BNPL legally permissible in India?
Yes, but it currently operates in a semi-regulated space. The RBI has begun imposing restrictions, but a comprehensive law is still lacking.
Q2: Can BNPL platforms report user data to credit bureaus?
Only registered financial entities are permitted to report to credit bureaus and only with informed customer consent.
Q3: What happens if I miss a BNPL payment?
Late fees may apply, and your credit score could be negatively affected. Some platforms may initiate legal or recovery proceedings.
Q4: Are BNPL and credit cards the same?
No. Credit cards involve revolving credit with bank oversight, while BNPL is a short-term deferred payment mechanism, often with looser regulatory controls.
References
Reserve Bank of India Circular: DOR.CRE.REC.No.74/21.06.007/2021-22
Consumer Protection Act, 2019
Indian Contract Act, 1872
IT Rules, 2011
Justice K.S. Puttaswamy v. Union of India (2017) 10 SCC 1
Central Inland Water Transport Corp. v. Brojo Nath Ganguly, AIR 1986 SC 1571
ASIC BNPL Review Report (Australia, 2021)
CFPB Market Analysis Report (USA, 2022)
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