Risks Unchecked, Paytm Stumbles

In a significant move against Paytm Payments Bank (PPBL), the Reserve Bank of India (RBI) has instructed the bank to cease accepting deposits or top-ups in any customer accounts, wallets, FASTags, and other instruments after March 15.

On January 31, 2024, the RBI directed Paytm to halt the acceptance of deposits or top-ups in any customer accounts, wallets, FASTags, and other instruments after February 29. On February 1, the RBI imposed additional restrictions on Paytm following a comprehensive system audit report and subsequent compliance validation report from external auditors, which revealed alleged persistent non-compliance and continued material supervisory action.

The following week, the traders’ body CAIT issued a cautionary advisory to traders, recommending they switch from Paytm to other payment options for business-related transactions. RBI Governor Shaktikanta Das stated that the action against Paytm stems from a ‘lack of compliance.’ The RBI clarified that the regulatory action is against PPBL, and the Paytm App itself will not be impacted.

Subsequently, Paytm established a group advisory committee on compliance and regulatory matters, with former Sebi chairman M Damodaran as its head.

In response, Paytm denied the allegations, asserting that “the Paytm app remains fully operational, and our services are unaffected.” The app can still facilitate quick payments between non-Paytm bank accounts as an intermediary but cannot accept direct deposits, significantly affecting the company’s wallet business.

The Paytm wallet functions like a bank account, allowing users to receive deposits, store money, and make payments via QR codes or mobile phone numbers as identifiers. Users can also transfer funds between their wallets and accounts in other banks, among other functions.

The regulatory crackdown has adversely affected thousands of small business owners who relied on the app for swift and convenient transactions. Additionally, the regulatory actions have led to a decline in investor confidence, prompting the withdrawal of significant investments and causing a downturn in Paytm’s shares. Industry experts suggest that this move could potentially lead to the payments bank losing its license in the coming weeks, further exacerbating investor concerns.

Vijay Shekhar Sharma, the founder of Paytm and formerly India’s youngest billionaire, has faced challenges. He’s been rallying his employees, reassuring investors, and comforting merchants. Sharma has met with officials from the RBI and reportedly sought assistance from the country’s finance minister. This isn’t the first time Paytm has faced issues with the banking regulator. Since 2018, the RBI has cautioned the company at least four times for various shortcomings.

Financial expert Srinath Sridharan highlights the seriousness of the central bank’s concerns. “The RBI has invoked provisions of a law that empower the regulator to act in the public interest. This underscores the severity of the situation. Paytm has lost the regulator’s confidence,” he commented.

Founded in 2010, Paytm gained prominence after India’s decision to demonetize high-denomination currency notes in 2016, which led to a surge in online transactions due to reduced cash circulation. Users began using the app for various purposes, from purchasing household items to paying for transportation and utility bills. Paytm attracted significant investments from SoftBank, Warren Buffett, and Alibaba.

Currently, at the centre of regulatory scrutiny, Paytm’s payments bank obtained its banking license in 2017. The bank can accept deposits up to 200,000 rupees but cannot offer lending services; it provides digital banking services, fixes deposits, and sells third-party insurance and loans. With 50 million accounts, including those of merchants using the platform’s QR code stickers, the bank plays a significant role in Paytm’s operations.

Sharma mentioned that his company is exploring partnerships with third-party banks to support merchant accounts, contributing half of Paytm’s revenues. However, this would entail sharing margins earned from deposits and transactions with the partner bank, further straining an already unprofitable entity. Paytm has witnessed an 80% decline in market value since its stock market listing two years ago.

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