The Reserve Bank of India (RBI) has taken a significant regulatory step against Paytm Payments Bank, implementing stringent restrictions that will dramatically alter the entity’s operational landscape from March 2024. This action comes in light of persistent compliance failures and breaches of regulatory standards identified during audits. As a result, Paytm Payments Bank will face prohibitions on accepting new deposits, engaging in credit transactions, and performing other banking services, marking a pivotal moment in its operational history.
In March 2022, the RBI had already initiated a crackdown on the bank by halting the onboarding of new customers and mandating a comprehensive System Audit. This was due to concerns over the bank’s adherence to regulatory requirements. The follow-up reports from external auditors have unfortunately underscored ongoing issues, compelling the RBI to escalate its supervisory actions.
Specifically, from the end of February 2024, Paytm Payments Bank will be restricted from conducting a range of activities. This includes accepting deposits, engaging in credit transactions, and facilitating top-ups across customer accounts, prepaid instruments, wallets, FASTags, and National Common Mobility Cards (NCMC), among other services. However, the bank will be allowed to credit interest, cashbacks, or refunds to accounts. Importantly, customers will retain the ability to withdraw or use their funds, including from savings and current accounts, prepaid instruments, FASTags, and NCMCs, up to their available balance.
The RBI’s directive also limits the bank’s service offerings post-February 2024. Beyond fund transfers, withdrawals, or utilisation of funds, Paytm Payments Bank is barred from providing additional banking services, including operations as Bharat BillPay Operating Units (BBPOU) and facilitating UPI transactions.
A significant operational change will be the termination of nodal accounts associated with its parent company, One97 Communications, and Paytm Payment Services by the end of February 2024. The bank is also tasked with settling all transactions initiated before this cutoff date by March 15, 2024, after which no further transactions will be permitted.
Payments banks, as regulated entities, are restricted to accepting deposits and are prohibited from offering loans unless in partnership with a regulated lender. They can issue debit cards but are barred from issuing credit cards without a co-branded or co-lending arrangement. Paytm Payments Bank, transitioning the prepaid payments instruments (PPI) license from One97 Communications upon its operational commencement in May 2017, finds itself in a precarious position, especially as it awaits final approval for a payments aggregator (PA) license.
The imposed restrictions essentially signal a cessation of banking operations for Paytm Payments Bank, necessitating a search for alternative avenues to continue its payment services. This development poses significant challenges for the entity’s operations, potentially impacting its ability to process payments beyond the confines of a payments bank.
Industry analysts have expressed concerns over the implications of the RBI’s actions. According to Bernstein Research, this move effectively ends the operations of Paytm Payments Bank, casting a shadow over the business’s regulatory landscape. While the UPI payment business, which constitutes a substantial portion of the bank’s gross merchandise value (GMV), may not see an immediate impact, there is a looming risk to payment margins, particularly for higher-margin products like wallets and FASTags that rely on the payments bank.
Furthermore, Jefferies highlighted potential repercussions for the lending business, which represents a significant portion of revenue. Operational and governance risks could prompt lending partners to reassess their collaborations with Paytm. The wallet GMV, merchant services, and FASTag GMV are identified as areas facing significant risk, potentially affecting the entity’s earnings and valuations.
In the wake of the RBI’s sanctions, numerous customers have expressed concerns on social media platforms regarding their wallet balances, fixed and savings deposits, and the continuity of using Paytm for UPI transactions. This regulatory measure underscores the importance of compliance within the banking sector and sets a precedent for the oversight of digital banking operations in India.