In a significant move, the Reserve Bank of India (RBI) has taken decisive action against Paytm. The Indian Central Bank on Wednesday, in a press release, directed Paytm Payments Bank Ltd. (PPBL, or the bank) to stop new credit and deposit operations, top-ups, fund transfers, and other such banking operations after February 29 this year.
The action comes after a thorough audit conducted by external auditors, revealing persistent non-compliance and ongoing supervisory concerns within the bank. Consequently, the RBI has imposed stringent measures on PPBL, according to the RBI's press release.
Customers will only be allowed to withdraw their balances from their accounts or other prepaid instruments. Earlier, RBI had banned PBPL from onboarding new customers on account of material supervisory concerns observed until it was able to complete its comprehensive IT audit.
In response to the RBI action, Paytm issued a statement on Thursday, February 01, saying that it would take steps immediately to comply with the RBI's directions ordered on Paytm Payments Bank. As a result, the company said that it expects to have a worst-case impact of ₹300 to 500 crore on its annual EBITDA going forward. However, it expects to continue on its trajectory to improve its profitability.
In the aftermath of the Reserve Bank of India's (RBI) actions against Paytm Payments Bank Ltd. (PBPL), Macquarie, a leading global research firm, analyses the potential impact on Paytm's vast customer base and its business operations.
Strategic Importance of PBPL: The payment bank currently hosts over 330 million wallet accounts, playing a pivotal role in Paytm's ecosystem. Given the current MTU (monthly transacting users) for Paytm is 100 million and the earlier ban was for onboarding new customers, Paytm could continue leveraging the PBPLs customer base for selling payments and financial products, said Macquarie.
Restrictions on Existing Customers: Existing PBPL customers are now constrained from conducting essential banking operations such as credit, deposits, fund transfers, UPI transactions, FASTag toll payments (with a 17% market share and 60 million users), bill payments, and wallet usage.
Impact on Customer Retention: The stringent restrictions imposed on PBPL are anticipated to hinder Paytm's ability to retain customers within its ecosystem. Macquarie emphasises that this limitation could have a profound impact on selling payment and loan products, leading to potential revenue and profitability challenges in the medium to long term.
The research firm believes that revenue and profitability implications in the medium to long term could be significant and remain a key item to monitor.
"We have seen the RBI take 15 months to revoke its ban on digital business activities of the largest private sector bank. However, in this case, since the first ban (in March 2022) for onboarding new customers (22 months have lapsed), RBI has conducted a comprehensive IT audit and continued to identify non-compliance, which in our view indicates that these lapses are quite material," said Macquarie.
"Accordingly, we do not see any near-term solution to these problems, and this effectively means, in our view, that the RBI is indirectly revoking the PPI (pre-paid instrument) licence of Paytm," it added.
"Governance issues: The bigger issue is that Paytm has not been on the good books of the regulator, and going forward, their lending partners could also re-look at the relationships in our view," as stated by Macquarie.
Meanwhile, Macquarie has a 'neutral' rating on Paytm stock with a target price of ₹650 apiece.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.
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