Opinion Express View on RBI action against Paytm: Payment blocked
Regulatory measures like this one must seek compliance, but should not be excessive
All entities must ensure compliance with the regulatory architecture. At the same time, the regulatory pushback, while ensuring compliance, must not be excessive. 
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Last week, the Reserve Bank of India announced a series of measures against the Paytm Payments Bank. Under section 35A of the Banking Regulation Act, 1949, the central bank barred the payments bank from accepting any deposits, undertaking credit transactions in customer accounts, wallets, FASTags, and others, after February 29. Action against the payments bank has been taken with the comprehensive system audit report and subsequent validation report of external auditors revealing “persistent non-compliances and continued material supervisory concerns”.
Shares of One97 Communications, which runs Paytm services and has a stake of 49 per cent in the payments bank, are down 42.35 per cent over the past five days. This, however, is not the first time that the payments bank has found itself in the regulatory crosshairs. In March 2022, the RBI had directed the payments bank “to stop onboarding of new customers with immediate effect”.
In October last year, the central bank had imposed a Rs 5.39 crore fine on it due to deficiencies in regulatory compliance, including, as reported in this paper, its failure to “identify the beneficial owner in respect of entities” that came on board its platform for providing pay out services, and delaying informing on a “cyber security incident”, among others.
Following the central bank’s actions now, with issues over new customers coming on board the platform, and non-compliance with KYC norms among others, sustaining existing financial relations or building new ones is likely to prove challenging for the entity.
As per a note by analysts at Macquarie, “the bigger issue is Paytm has not been on the good books of the regulator and going forward, their lending partners also could possibly re-look at the relationships in our view.”
Paytm is one of the largest fintech players in the country. As per the bank’s website, it has over 300 million wallets and 30 million bank accounts. It has around 100 million KYC customers, and is also the largest issuer of FASTags.
The central bank’s actions will have an impact on both customers and merchants. On Sunday, the Confederation of All India Traders (CAIT), fearing disruptions, advised small traders, vendors, hawkers, and others, to switch to other payment modes. However, the lack of compliance, the non-adherence to KYC norms despite the issues being repeatedly pointed out, is inexplicable.
All entities must ensure compliance with the regulatory architecture. At the same time, the regulatory pushback, while ensuring compliance, must not be excessive.
In the past as well, some questions have been raised over interventions in the area of payments such as e-mandates.
Actions must be carried out in a transparent manner, acknowledging the implications for millions of users. Considering the rapid expansion of the digital economy, and especially financial transactions, regulatory interventions, while ensuring the stability of the financial system, must take care not to throttle innovation.
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