The Reserve Bank of India (RBI) has recently imposed restrictions on Paytm Payments Bank, preventing it from offering its core services, including accounts and wallets, starting from March. This move doesn’t constitute a cancellation of the bank’s license, but it severely limits its operations. Customers, however, are permitted to withdraw or use their balance without any constraints up to the available amount. Paytm, once hailed as a pioneer in India’s fintech revolution, boasts a substantial customer base, with the company claiming to have over 100 million KYC-verified customers on its website. Additionally, Paytm Payments Bank, under the part-time chairmanship of its founder, Vijay Shekhar Sharma, is recognized as the largest issuer of FASTags, having issued over 8 million units.
The Reserve Bank of India (RBI) has issued directives prohibiting Paytm Payments Bank from offering the majority of its core services, including accepting deposits, prepaid instruments, wallets, FASTags, and the National Common Mobility Card (NCMC), starting from March 1. This action follows “persistent non-compliances and material supervisory concerns.” The RBI explicitly states that the bank should cease providing other banking services such as fund transfers (including AEPS, IMPS, etc.), BBPOU, and UPI facilities after February 29, 2024. Additionally, the RBI has instructed the termination of nodal accounts belonging to the parent company, One97 Communications, and Paytm Payments Services, to be executed no later than February 29. The settlement of all pipeline transactions and nodal accounts, initiated on or before February 29, is mandated to be completed by March 15, with no transactions allowed thereafter, as per the central bank’s directives.
Customers are allowed to withdraw or use their stored balances in various Paytm instruments, such as savings bank accounts, current accounts, prepaid instruments, FASTags, and NCMC, without any restrictions as per the RBI. However, the RBI statement does not explicitly address services like loans, mutual funds, bill payments, digital gold, and credit cards.
In response to the RBI’s actions, Paytm’s parent company, One97 Communications Ltd, has stated that it is promptly taking measures to comply with the RBI’s directives. The company is actively collaborating with the regulator to address concerns at the earliest. Following the 20% decline in Paytm shares on the exchanges, One97 Communications anticipates a potential worst-case impact of Rs 300-500 crore on its annual EBITDA going forward, depending on the resolution’s nature.
Additionally, as part of their compliance strategy, One97 Communications will exclusively collaborate with other banks and cease working with Paytm Payments Bank, as indicated in an exchange filing.
Paytm has stated that it will continue to provide acquiring services to merchants in collaboration with various leading banks in the country. The Paytm Payment Gateway business, serving online merchants, will maintain its focus on delivering payment solutions to its existing merchants, with plans to expand third-party bank partnerships. Offline merchant payment network services, including Paytm QR, Paytm Soundbox, and Paytm Card Machine, will continue unaffected, allowing for the onboarding of new offline merchants.
The RBI’s recent action against Paytm has not been accompanied by specific reasons from the central bank. However, scrutiny from the RBI has been ongoing since 2018, with potential concerns related to KYC compliance and IT issues. The central bank is cautious about exposing depositors’ funds to any risks posed by financial institutions or banking entities.
Sources suggest that the RBI’s intervention could be linked to issues such as the purported lack of adequate information barriers within the Paytm Payments Bank and its parent company, One97 Communications Ltd. Additionally, concerns were raised about data access by China-based entities that held indirect stakes in the payments bank through their ownership in the parent company. Allegedly, the failure to address these concerns at various levels over an extended period prompted the RBI’s recent actions.
Antfin, an affiliate of the Chinese conglomerate Alibaba, holds a 9.89% stake in One97 Communications as of December 31, 2023, according to stock exchange data. Given the strained relationship between India and China, Chinese investments in Indian companies, including Paytm, have faced heightened scrutiny from Indian regulators.
The RBI has taken previous actions against Paytm. In October 2023, the RBI imposed a fine of Rs 5.39 crore on Paytm Payments Bank for regulatory compliance deficiencies, including failure to identify beneficial owners, inadequate monitoring of payout transactions, breaches of regulatory balance limits, and delayed reporting of a cybersecurity incident. In March 2022, the RBI directed Paytm Payments Bank to cease onboarding new customers due to persistent non-compliances and supervisory concerns revealed in external audit reports.
As early as 2018, the RBI had raised concerns about Paytm’s user acquisition processes, particularly regarding KYC norms. The central bank also expressed apprehensions about the close relationship between Paytm Payments Bank and its parent company, One97 Communications. Payments banks are required to maintain an arm’s length distance from their promoter group entities. At the time, OCL held a 49% stake in Paytm Payments Bank, while Paytm founder Vijay Shekhar Sharma held 51%. There were additional allegations related to the payments bank’s failure to meet the Rs 100-crore net worth criteria and exceeding the Rs 1-lakh deposit limit per account for payments banks.
