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Prepaid Payment Instruments - Explained

Published on Thursday, December 26, 2019
prepaid payment instruments
Today, we will discuss all about prepaid payment instruments, what are they, types and how they function. Post your queries in the comments section below.

What are prepaid payment instruments?

Prepaid payment instruments are those which facilitate the purchase of goods and services against the value stored on such instruments. The value stored on them is paid by the holder using a medium (cash, debit card, credit card etc).

These are generally issued in the form of smart cards, mobile wallets, paper vouchers, internet accounts/wallets.

Classification of PPIs

PPIs are usually classified into 5 categories as follows:

1. Closed System Payment Instruments
  • They are usually issued by businesses/organizations for buying their own products or services only. 
  • These instruments do not permit cash withdrawal. 
  • RBI approval is not required to issue these Payments Instruments.
  • E.g. - Delhi Metro Prepaid card - these can be used for their respective establishments only. 

 2. Semi-Closed System Payment Instruments
  • These Payment Instruments can be used for the purchase of goods and services at a group of clearly identified merchants/locations/places which have a specific contract with the issuer to accept the Payment Instrument.
  • Do not permit cash withdrawal. 
  • E.g. - Sodexo cards are redeemable at designated stores only. 
  • They can be recharged or topped up.
  • Money stored in Wallet is actually in the companies account. Example: Paytm, Airtel Money, Vodafone mPaisa, Mobikwik etc.
3. Semi-Open System Payment Instruments
  • These payment instruments can be used at any card accepting point of sale terminals for purchase of goods and services.
  • Do not permit cash withdrawals.
  • E.g. - Gift cards

4. Open System Payment Instruments
These Payment systems can be used for the purchase of goods and services including financial services like fund transfer at any card accepting merchant location( Point of sale terminal) and also permits cash withdrawal at ATM.
  • These can be or sometimes can't be recharged or Topped up.
  • Only Banks can issue these Instruments.
  • Cash withdrawal permitted. Example: MasterCard, Rupay(Indian one), Visa etc.

    Who can issue them?

    Only those entities who are incorporated in India,  have a minimum paid-up capital of Rs. 5 crore and minimum positive net worth of Rs 1 crore at all times are permitted to issue such instruments. They should also be in compliance with the capital adequacy requirements of RBI from time to time.

     Where the money collected can be used?

    • For PPIs issued by SCBs and NBFCs, outstanding balances are a part of net time and demand liabilities for the purpose of maintenance of reserve requirements. 

    • For PPIs issued by other entities, outstanding balances are to be maintained in an escrow account (non-interest bearing) account with any SCB. 

    • Entities who have been into business for >1 year & whose accounts have been duly audited for a full accounting year can keep their these funds in an interest-bearing account. But no loan can be given against such interest-bearing deposit. 


    All PPIs issued in the country shall have a minimum validity period of 6 months from date of issuance or activation.

    RBI's move after Demonetization

    RBI in November 2016 doubled the limit of prepaid payment instruments limits to Rs 20,000 from the earlier limit of Rs 10,000 to facilitate digital transactions. Balance in such PPIs can not exceed Rs 20,000 at one point in time.

    Update (26 December 2019)

    RBI introduced a new type of semi-closed Prepaid Payment instrument with the following features :
    • These PPIs shall be reloadable in nature and issued in card or electronic form. 
    • Loading / Reloading shall be only from a bank account.
    • The amount loaded in such PPIs during any month shall not exceed Rs.10,000 and the total amount loaded during the financial year shall not exceed Rs.1,20,000.
    • The amount outstanding at any point of time in such PPIs shall not exceed Rs.10,000.
    • These PPIs shall be used only for the purchase of goods and services and not for funds transfer.

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