
Crushing curbs on Paytm Payments Bank
Summary
- RBI bars deposits, top-ups at Paytm Payments Bank as FASTag and wallet will become inoperable
Customers of Paytm Payments Bank will not be able to make fresh deposits or top up wallets, FASTags and mobility cards issued by it after a month, as the central bank cracked down following an audit that revealed “persistent non-compliances" and “continued material supervisory concerns" at the payments bank.
However, customers can freely withdraw their money, the Reserve Bank of India (RBI) said in a statement. Interest payments, cashbacks and refunds can continue to be credited to these accounts. But it cannot provide any banking service or facility other than fund transfers, bill payments and UPI (Unified Payments Interface) from 1 March.
“For all practical purposes, the above notifications end the operations of Paytm Payments Bank. This is a definite negative development and adds to the already heavy regulatory overhang on the business," analysts at Bernstein said in a note on Wednesday.
RBI clamped down under Section 35A of the Banking Regulation Act. The section relates to the central bank’s power to issue directions in public interest or to prevent the affairs of any bank being conducted in a manner detrimental to the interests of the depositors, besides others.
The new restrictions come nearly two years after the payments bank was barred from signing up new customers.
Also, in October, RBI had fined it ₹5.39 crore for non-compliance with some provisions of KYC (know your customer) guidelines, cybersecurity framework, etc.
Paytm Payments Bank is an associate company of listed One97 Communications Ltd, which held a 49% stake in it as on 31 March 2023. Shares of One97 Communications closed at ₹761 on the BSE on Wednesday, unchanged from a day ago. The RBI announcement came after market hours.
Experts said the FASTag business of the company would be severely impacted as customers would now need to look for an alternative issuer.
The regulator also asked the bank to terminate all nodal accounts of One97 Communications and Paytm Payments Services by the end of February. All transactions in the pipeline and nodal accounts that were initiated by end-February need to be completed by 15 March.
A nodal account acts as a link between merchants, customers and intermediaries like payment aggregators and payment gateways. Money paid by customers is sent to the nodal accounts before being settled with the merchant or seller.
Experts, however, said that the RBI order on nodal accounts would not impact the point-of-sale (PoS) business of Paytm. “My reading is that nodal accounts that One97 Communications would have with Paytm Payments Bank will have to be terminated. One97 may have nodal accounts with other banks, which I believe would continue and, therefore, the primary business of One 97—PoS terminals—would not get impacted," said Parijat Garg, a fintech expert.
A former RBI official said the regulator takes a grave view of repeated non-compliance, which would have been the case with Paytm. “It would have not been able to rectify deficiencies pointed out by the regulator despite extending the deadline to do so. RBI does not take these things lightly," the former official said, adding that central bank has depositor interest to keep in mind.
Others compared the RBI action to a moratorium on Paytm Payments Bank, except that there is no bar on withdrawal of deposits.
“It could mean further erosion of deposits if its consumers start withdrawing from the bank. The RBI restriction would leave the company in a difficult position as it would no longer be able to cross-sell products on its platform and customers might not be interested in keeping money in their accounts when they cannot use it," said Srinath Sridharan, a policy researcher and corporate advisor. He added that since banking is all about consumer trust, it looks like Paytm Payments Bank has to build it all over, especially with the regulator.
Paytm Payments Bank’s deposit base stood at ₹3,285.26 crore on 31 March 2023, up from ₹2,642.34 crore in the previous year, showed data from the Registrar of Companies.
As per RBI data, it accounted for 27% of deposits with all payments banks in the country.
Introduced during the tenure of former RBI governor Raghuram Rajan, payments banks aim to reach the under-banked and unbanked population, accepting deposits up to ₹2 lakh per customer. They, however, cannot lend.