RBI action against Paytm: probable causes, effects, and what happens to your money

However, the central bank has allowed the withdrawal or utilisation of balance amounts by customers “without any restrictions, up to their available balance”.

Paytm, which was once the poster boy of India’s fintech revolution, has a significant customer base. On its website, Paytm Payments Bank says it has more than 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 part-time chairman of the bank.

What does the RBI direction say?

Paytm Payments Bank has been barred from offering almost all of its key services — accepting deposits or top-ups in any customer account, prepaid instruments, wallets, FASTags, National Common Mobility Card (NCMC), etc., after February 29 in the wake of “persistent non-compliances and material supervisory concerns”.

“No other banking services…like fund transfers (irrespective of name and nature of services like AEPS, IMPS, etc.), BBPOU and UPI facility should be provided by the bank after February 29, 2024,” the RBI has said.

It has directed that the nodal accounts of the parent company One97 Communications and Paytm Payments Services should be terminated at the earliest, and not later than February 29.

The 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 transactions shall be permitted thereafter, the central bank has said.

Can customers use or withdraw their stored balances in various Paytm instruments?

As per the RBI, withdrawal or utilisation of balances by customers from their Paytm accounts including savings bank accounts, current accounts, prepaid instruments, FASTags, NCMC, etc. are permitted without any restrictions, “up to their available balance”.

The RBI statement, however, does not mention a number of other services like loans, mutual funds, bill payments, digital gold, and credit cards.

What has Paytm said in response to the RBI action?

As Paytm shares fell 20 per cent on the exchanges on Thursday (February 1), One97 Communications Ltd said it was “taking immediate steps to comply with RBI directions”, including working with the regulator to address their concerns as quickly as possible.

Depending on the nature of the resolution, the company expects the RBI action to have a worst-case impact of Rs 300-500 crore on its annual EBITDA (earnings before interest, tax, depreciation and amortisation) going forward.

Also, going forward, One97 Communications will be working only with other banks, and not with Paytm Payments Bank, it said in an exchange filing.

“We offer acquiring services to merchants in partnership with several leading banks in the country and will continue to expand third-party bank partnerships. The Paytm Payment Gateway business (online merchants) will continue to offer payment solutions to its existing merchants,” it said.

OCL’s offline merchant payment network offerings like Paytm QR, Paytm Soundbox, Paytm Card Machine, will continue as usual, where it can onboard new offline merchants as well, Paytm said.

What led to the RBI’s action against Paytm?

The central bank gave no reasons for its action. However, Paytm Payments Bank has been facing scrutiny from RBI since 2018.

Sources said the RBI’s action could be due to concerns on KYC compliance and IT-related issues. The central bank is concerned about allowing any institution or banking entity to expose depositors’ money to such risks.

It is learnt that Paytm Payments Bank and its parent OCL also came under RBI scrutiny for purported lack of requisite information barriers within the group, and data access to China-based entities that were indirect shareholders in the payments bank through their stake in the parent company.

The failure to address these concerns at multiple levels over an extended period led to the latest action by the RBI, it is learnt.

Antfin, an affiliate of the Chinese conglomerate Alibaba, is a shareholder in One97 Communications — as of December 31, 2023, Antfin held 9.89% stake in the company, stock exchange data show. 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.

What other actions has RBI taken against Paytm earlier?

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

In March 2022, the RBI directed Paytm Payments Bank to stop the 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, the RBI said on January 31.

Even before 2022, the central bank had made certain observations in 2018 about the processes the company followed to acquire new users, especially on KYC norms.

The RBI also had concerns over the close relationship between Paytm Payments Bank and its parent One97 Communications. Payments banks are required to maintain an arm’s length distance from promoter group entities. OCL held 49% stake in Paytm Payments Bank, while 51% was held by Paytm founder Vijay Shekhar Sharma.

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