RBI curbs on Paytm Payments Bank: Can’t take deposits, offer other services after February 29

Neither Paytm Payments Bank nor its parent company, One97 Communications, commented on the RBI action.

“No further deposits or credit transactions or top-ups should be allowed in any customer accounts, prepaid instruments, wallets, FASTags, NCMC cards, etc. after February 29, 2024, other than any interest, cashbacks, or refunds which may be credited anytime,” the RBI said on Wednesday.

“Withdrawal or utilisation of balances by its customers from their accounts including savings bank accounts, current accounts, prepaid instruments, FASTags, National Common Mobility Cards, etc. are to be permitted without any restrictions, upto their available balance,” it added.

According to the Paytm Payments Bank website, it has over 100 million Know Your Customer (KYC)-verified customers. “We are also the largest issuer of FASTag with over 8 million FASTag units issued,” the website says. Paytm founder and chairman Vijay Shekhar Sharma is also the part-time chairman of the bank.

Paytm has been facing RBI scrutiny since 2018. While the RBI did not specify the reasons for the latest action, sources in the know said it could be due to concerns over KYC compliance and IT-related issues. The central bank is against allowing any institution or banking entity to expose depositors’ money to such risks.

It is learnt that Paytm Payments Bank and One97 Communications had also come under RBI scrutiny for purported lack of requisite information barriers within the group, and data access to China-based entities that were indirect shareholders through their stake in the parent company. The failure to address these concerns at multiple levels over an extended period is learnt to have led to the latest action by the RBI.

Although Antfin, an affiliate of Chinese conglomerate Alibaba, has been reducing its stake in One97 Communications, it is still a shareholder in the company. As of December 31, Antfin held 9.89 per cent stake in the company, according to stock exchange data. Given the frosty relationship between India and China over the past few years, Chinese investments in Indian companies have attracted intense scrutiny by Indian regulators.

In October 2023, the RBI had slapped a fine of Rs 5.39 crore on Paytm Payments Bank due to deficiencies in regulatory compliances. According to the regulator, Paytm failed to identify beneficial owner in respect of entities onboarded by it for providing payout services, did not monitor payout transactions and carry out risk profiling of entities availing payout services, breached the regulatory ceiling of end-of-the-day balance in certain customer advance accounts, and even delayed reporting a cyber security incident.

Sources in the government said the matter was the prerogative of the RBI and no directions or guidelines were issued by the finance ministry. “It is a supervisory action taken by the regulator… The order itself contains the reasons for taking this action. The finance ministry does not issue any guidelines on such operational matters which fall under the purview of the regulator,” a ministry source said.

In its press release on Wednesday, the RBI said: “In press release dated March 11, 2022, the Reserve Bank of India… had directed Paytm Payments Bank Ltd to stop onboarding of new customers with immediate effect. The comprehensive system audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action.”

According to the central bank’s directions, the nodal accounts of Paytm’s parent company are to be “terminated at the earliest”, and latest by February 29. Settlement of all pipeline transactions and nodal accounts – in respect of all transactions initiated on or before February 29 — should be completed by March 15, and no further transactions shall be permitted thereafter.

Prior to its action in 2022, the RBI had made certain observations in 2018 about the processes the company followed to acquire new users, especially on KYC norms. It also had concerns over the close relations between Paytm Payments Bank and One97 Communications. Payments banks are required to maintain an arm’s length distance from promoter group entities. One97 Communications held 49 per cent stake in Paytm Payments Bank, while the remaining 51 per cent was held by Paytm founder Sharma.

There were also allegations that the payments bank had failed to meet the Rs 100-crore net worth criteria and also exceeded the Rs 1-lakh deposit limit allowed per account for payments banks at the time.