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In the ever-evolving landscape of India's digital finance ecosystem, Paytm Payments Bank Ltd (PPBL) finds itself at the epicenter of a seismic regulatory shakeup orchestrated by the Reserve Bank of India (RBI). Commencing February 29, 2024, PPBL is barred from acceptance of deposits in its accounts or popular wallets. The regulatory measures impact various financial instruments of PPBL, including customer accounts, prepaid instruments, wallets, FASTags, National Common Mobility Cards (NCMC), payments to billing services, and utilization of the UPI facility.
This regulatory intervention finds its roots in Paytm's repeated non-compliance and disregard for regulatory directives, as unearthed by a comprehensive system audit. The situation escalated due to the company's persistence in customer onboarding without proper Know Your Customer (KYC) checks and continued breaches of compliance standards. Deepali Pant Joshi, former Executive Director of RBI, characterized the unfolding events as a "disaster in the making since October 2023." In that month, Paytm faced a fine of ₹5.39 crores. But the company seemingly downplayed the severity of the reasons behind the penalty.
The RBI's dissatisfaction with Paytm Bank also seems to stem from the close association between Paytm and PPBL. Despite their distinct legal entities, the profound integration between them has raised red flags for the RBI. Paytm, operating under the banner of One 97 Communications, holds a 49% stake in Paytm Payments Bank, while Vijay Shekhar Sharma owns the remaining 51%, according to the company's 2022-23 annual report. This interdependence is evident in multiple facets, such as exclusive access to Paytm Payments Bank via the Paytm app, the availability of bank funds solely through the app, and app-centric registration and login. Notably, the Paytm app functions as the principal platform for the promotion and distribution of all banking services. As we delve into the heart of the matter, an external audit, sanctioned by the RBI, revealed instances of non-compliance with regulations and raised significant supervisory concerns related to Paytm's financial records.
While Payments Banks are limited to accepting deposits and cannot provide loans, Paytm offered buy-now- pay-later (BNPL) services in collaboration with other lenders, providing personal loans up to Rs. 60,000 at 0% interest. This deviation raised eyebrows as it involved Paytm selling products not allowed for a bank, causing confusion among users.
Further, all of Paytm's 330 million-plus wallet accounts and 150 million-plus UPI handles are housed within Paytm Payments Bank. In response, the RBI has instructed One97 Communications Ltd (ONCL) and Paytm Payments Service Ltd to promptly terminate their nodal accounts with the bank.
Despite the stringent measures, the RBI has demonstrated a nuanced approach, allowing existing Paytm customers to make withdrawals from their savings and current bank accounts. They can also utilize balances in prepaid instruments, FASTags, and NCMC cards until exhaustion. This strategic move ensures a fair transition for consumers while upholding the central bank's commitment to regulatory adherence.
In conclusion, the RBI's decisive regulatory measures on Paytm Payments Bank mark a significant chapter in India's fintech sector's regulatory journey. The unfolding developments will serve as a benchmark for how regulatory authorities navigate the balance between innovation and compliance in this ever-changing digital financial landscape. The estimated impact on EBITDA for Paytm, ranging from Rs 300 to 500 crores, underscores the gravity of the situation and poses a formidable challenge for Paytm as it seeks to navigate these turbulent regulatory waters.