Why did RBI cancel Paytm payment bank's banking license? All you need to know

The Reserve Bank of India (RBI) on Friday scrapped the banking licence issued to Paytm Payments Bank Limited, more than two years after barring it from accepting deposits or top-ups.

The move effectively prohibits the payments bank from carrying out any banking business, following years of regulatory friction caused by persistent non-compliance. RBI has repeatedly flagged serious concerns in the bank's operations, which ultimately led to this action.

In the official statement released yesterday, the central bank said that Paytm Payments Bank's operations were conducted in a manner that was “detrimental to the interest of the bank and its depositors.”

"The general character of the management of the bank is prejudicial to the interest of depositors as also the public interest," RBI noted.

It also added that “No useful purpose or public interest would be served by allowing the bank to continue.” Meanwhile Paytm clarified that the cancellation of the bank's licence will not have any financial impact on the company.

What actions have been taken against the payments bank so far?

Previously, the central bank has taken some actions against Paytm Payments Bank. Here's a timeline of the developments:

• March 2022: Paytm Payments Bank was barred by the RBI from onboarding new customers, following supervisory concerns around its compliance processes, particularly in areas such as KYC.
• March 2024: The RBI imposed stricter restrictions on Paytm Payments Bank, prohibiting it from accepting new deposits, processing credit transactions, or allowing top-ups in customer accounts, wallets, FASTags, and NCMC cards.

What happens next?

Founded by One97 Communications and its founder Vijay Shekhar Sharma, the payments bank will now undergo winding-up proceedings, with the RBI set to approach the High Court to initiate the process.

Paytm Payments Bank has “enough liquidity” to repay its entire deposit liability upon winding up of the bank, RBI was quoted as saying by Bloomberg News.

Sharma, launched Paytm Payments Bank Limited in 2017. However, it soon landed in trouble with the regulators over persistent non-compliance, including KYC Irregularities and concerns over illegal financial activities. Sharma held a 51% stake in the business, while One97 Communications owned 49% stake.

According to its FY 2024-25 annual report, Paytm Payments Bank had 30 million bank accounts, with over 100 million KYC-compliant users, and more than 300 million wallet users. It also stood as the largest issuer of FASTag, with more than 8 million tags in circulation.

What does this mean?

This is the first time such action has been taken by the regulator against a specialised bank, which highlights the shrinking significance of payment banks in the banking system.

Indian regulators conceptualised payment banks in 2014 to facilitate small deposits and cash transfers, but the banks lost their relevance after people increasingly started using real-time digital transfers through Unified Payment Interface (UPI), according to Reuters.

While business dwindled, compliance costs rose as the regulator feared small deposit accounts could be misused and hence, directed these banks to tighten monitoring, the agency said.

Share price trend

Since the development came after market hours on Friday, the stock of One97 Communications is likely to be focus when markets reopen on Monday.

Shares of the company closed 0.5% lower on Friday. While the stock gained around 32% over the past year and 8% in the last month, it has declined around 2% over the past five trading sessions.

Ever since the company went public in November 2021, its stock has plunged 26%, according to data from NSE.