“Onboarding of new customers by Paytm Payments Bank Ltd will be subject to specific permission to be granted by the Reserve Bank of India (RBI) after reviewing (the) report of the IT auditors,” the central bank said in a statement late Friday. “This action is based on certain material supervisory concerns observed in the bank.”
Action against Paytm Payments Bank Ltd under section 35 A of the Banking Regulation Act, 1949https://t.co/tqWfwt7mT3
— ReserveBankOfIndia (@RBI) 1646999533000
Paytm didn’t respond to ET’s queries until the publication of this report.
Paytm Payments Bank joins a swelling list of financial companies and lenders, such as MasterCard, Diners Club, American Express and HDFC Bank, that have been penalised for systemic glitches. The banking regulator is keen on building a failsafe payments system in India where transactions are being increasingly done digitally.
Paytm Payments Bank has been directed to appoint an IT audit firm to conduct a comprehensive audit of its IT systems, RBI said in its short communication.
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“The RBI action is a result of a series of compliance and regulatory issues with Paytm. These include KYC compliance and also IT related issues,” a person familiar with the RBI action told ET. “The central bank is very clear that it cannot allow depositors’ money to be exposed to such risks. This action comes after many rounds of communications to Paytm, and it has been taken to pinch them hard so that they comply.”
Paytm Payments Bank is a joint venture between Paytm founder Vijay Shekhar Sharma and the listed holding company One97 Communications, the parent of Paytm. Sharma owns 51% in the bank in his personal capacity.
It started operations in 2017 and claims to have 60 million bank accounts with 4 lakh users added every month, according to its website. It is also one of the largest issuers of the FASTag system for toll payments at highways, with more than 8 million FASTag units issued so far.
This is the second time that Paytm is facing a regulatory ban. In June 2018, RBI had made certain observations about the processes the company followed to acquire new users, especially in relation to know-your-customer (KYC) norms.
The RBI had then said in response to a public-interest query that Paytm was in violation of the KYC rules, leading to the ban. Furthermore, RBI’s reply to the RTI (Right to Information) question also mentioned that Paytm failed to maintain the end-of-the-day balance limit of Rs 100,000 per account.
Small Finance Bank Licence
Friday’s regulatory order comes as a big blow to Paytm’s plans of converting itself into a small-finance bank (SFB). Paytm was looking to apply for the small-finance bank licence in August this year. In the past, Paytm has held several rounds of discussions with the central bank on the SFB licence, having publicly articulated its aspirations to convert itself into an SFB.
Paytm has lost nearly two-thirds of its initial value since listing, and its market capitalization has shrunk to just above Rs 50,000 crore from nearly three times as much during the initial public offering (IPO).
Banking consultant and RBI watcher Ashvin Parekh said the central bank’s action shows non-compliance has its consequences.
“World over, central banks have become tough on compliance and the RBI is no different,” Parekh said. “The actions against the entities are because of different reasons. At HDFC Bank, it was due to service deficiencies and digital outages, while the curbs on Mastercard were due to data storage issues. These things take time to resolve and even in this case, Paytm will have to conduct an audit and correct its course.”
In December 2020, the RBI had stopped HDFC Bank, the largest issuer of credit cards in the country, from issuing new cards and introducing new digital products after multiple systemic glitches were reported in the preceding two years. The ban was lifted in August 2021.
In April 2021, the central bank had banned the US-based card company Diners Club from onboarding new domestic customers onto its card network for violating data storage norms. That ban was lifted in November 2021 after Diners Club complied with the stipulated norms. American Express, which was also banned along with Diners Club, continues to face restrictions.
In July 2021, RBI had also placed curbs on Mastercard for non-compliance with local data storage norms. The ban has not yet been lifted.
Paytm Payments Bank is one among the six such businesses in operation out of the 10 licences the RBI issued in 2015. Subsequently, RBI allowed payment banks to convert themselves into small finance banks, provided they met pre-set criteria.
