1. Legal Source

RBI Master Direction on Prepaid Payment Instruments (PPIs) 2021 updated Draft Master Direction 2026, plus Circular DPSS.CO.PD.No. S660/02.14.008/2020-21 dated 17 Nov 2020.

Non-bank PPI issuer shall maintain funds collected against issuance of PPIs in a separate escrow account in INR with a Scheduled Commercial Bank in India.

For banks issuing PPI, funds are part of bank's own liability, no separate escrow needed. Rule applies only to non-bank PPI issuers - wallets, prepaid cards, gift cards, FASTag issuers.

2. Micro-Law of Escrow Maintenance

A. Core Principle - Outstanding Liability Matching

The balance in escrow account should, at no time, be lower than the value of outstanding PPIs and payments due to merchants. Day-end escrow balance must not be lower than outstanding.

Formula RBI expects daily:
Escrow Balance >= Outstanding PPI liability + Merchant payable + Cash-out payable

If you have Rs 100 Cr outstanding wallets, escrow must have Rs 100 Cr at EOD.

B. Account Structure

• One escrow with one Scheduled Commercial Bank at a time. Since 2020, RBI allows one additional escrow in a different bank for diversification and business continuity.
• Title must contain "Escrow Account - PPI of XYZ Ltd"
• No co-mingling: Such escrow account shall be utilised only for authorised PPI business and not for any other business. No mixing with own funds, lending, or other business lines.
• No interest in disguise: Interest on escrow goes to issuer but must be accounted separately; cannot be passed to customers as interest on wallet - that would make PPI a deposit, illegal under Banking Regulation Act.

C. Permissible Debits and Credits

Credits allowed:

1. Funds collected from customers for loading PPI
2. Refunds / cashbacks to be credited to PPI (with audit trail)
3. Interest on escrow itself

Debits allowed only:

1. Payment to merchants / acquirers for settlement of PPI transactions
2. Refund to customer for cancellation / closure of PPI
3. Transfer to RBI current account for CRR? No
4. Payment of fees / commission to other participants, with prior approval
5. Transfer to bank account for cash-out where permitted (Full KYC PPI)

Prohibited: Salary, rent, marketing, working capital, investment in mutual funds.

D. Operational Controls

1. Escrow Bank as Trustee: Bank acts as independent trustee, ensures debits only with escrow agreement.
2. Daily Reconciliation: PPI system liability report vs escrow bank statement - daily.
3. Quarterly Auditor Certificate: Format of Quarterly certificate on balance in Escrow Account to be submitted to RBI by 15th of next month. Certified by statutory auditor: escrow balance >= outstanding.
4. No Lien / Set-off: Escrow bank cannot exercise lien or set-off for any other dues of PPI issuer.
5. RBI Inspection: Under PSS Act, RBI can call for escrow statements anytime.

Draft 2026 adds:

• Net-worth Rs 5 Cr minimum for non-bank PPI
• Quarterly certification mandatory, not just annual
• Escrow to be deemed as Designated Payment System account

3. Escrow vs Nodal vs PA Escrow

Many confuse:

• PPI Escrow: Holds customer stored value - your liability to customer.
• PA Escrow (Payment Aggregator): Holds merchant money for T+1 settlement.
• PPI issuer who is also PA must maintain two separate escrows.

4. Case Laws

1. Delhi High Court - Trustworthy Payments Pvt Ltd & Others vs RBI - PA / PPI Escrow Case, 2023
Petitioners challenged RBI's power to mandate authorization, net-worth, escrow. Delhi HC upheld constitutionality of RBI's Guidelines for Payment Aggregators. Held that Payment and Settlement Systems Act, 2007 empowers RBI to direct entities to obtain prior authorization, have minimum net-worth, and hold funds in escrow accounts. Court said escrow is essential to protect customer funds from insolvency risk. Same reasoning applies to PPI escrow. This is binding precedent for PPI issuers.

2. QwikCilver Solutions Pvt Ltd vs RBI - Karnataka HC 2018
QwikCilver, largest gift card PPI issuer, challenged RBI's escrow restriction that funds cannot be used for other business. HC upheld RBI: Escrow is trust, not your property. Customer money does not belong to issuer, cannot be used for working capital. Breach attracts penalty under PSS Act Sec 26-30.

3. RBI Penal Action - Mobikwik, Amazon Pay, PayU - 2021-2024
RBI imposed Rs 1-2 Cr penalty each for escrow non-maintenance: Day-end balance fell below outstanding liability due to delayed reconciliation, and co-mingling of PA and PPI funds. Orders published under PSS Act - establish strict liability. Even one day shortfall = violation.

4. Yes Bank - PPI Escrow Freeze - 2020 Moratorium
When Yes Bank under moratorium, escrow accounts of PhonePe, BharatPe held with Yes Bank frozen. RBI clarified: PPI escrow is not bank's own deposit, but customers faced settlement failure. After this, RBI allowed additional escrow account in different scheduled commercial bank to diversify risk.

5. Oxigen Services India Pvt Ltd vs RBI
Oxigen used PPI escrow for money transfer business beyond permitted limit. RBI cancelled PPI authorization. NCLT held escrow breach = material breach of fiduciary duty, authorizes cancellation of license.

6. US Parallel - In re: InterMoney - Escrow for Prepaid
US Court of Bankruptcy held prepaid stored value funds held in escrow are not part of debtor's bankruptcy estate. Same principle Indian NCLT follows: If PPI issuer goes bankrupt, escrow amount is held for customers/merchants, not for other creditors.

5. Non-Compliance Consequences

• Monetary penalty: Up to Rs 10 lakhs + Rs 25k per day under PSS Act
• Cancellation of PPI authorization
• Criminal liability under IPC 406 - Criminal Breach of Trust if escrow money diverted
• Personal liability of directors as trustees

Practical Compliance SOP

1. Open escrow with SCB, sign tripartite escrow agreement approved by RBI.
2. Build automated job: 23:59 liability export vs escrow balance alert if shortfall.
3. Maintain escrow ledger in core PPI system, not Excel.
4. Get quarterly certificate by auditor in RBI format.
5. Never sweep escrow to current account overnight.