On the evening of January 31, the Reserve Bank of India barred Paytm Payments Bank from undertaking any banking activities whatsoever — no deposits, no credit transactions, no wallet top ups, no bill payments, nothing — after February 29.
CNBC-TV18 spoke to several people involved in the matter, and industry watchers to get an insight into the series of events which led to the final clampdown on the bank, and it seems to have started within a year of Paytm Payments Bank (PPBL) coming into existence over six years ago. These are grave violations, which left the bank’s customers at risk of data breaches and frauds at the very least, and larger issues around a lack of transparency from the promoters, including and not limited to, submitting false compliance reports to the regulator on various instances, as per CNBC TV18.
Series of Lapses at Paytm Payments Bank, History of Non-Compliance
“We acknowledge the recent RBI directive regarding Paytm Payments Bank and are taking this very seriously. As indicated in the RBI press release dated January 31st, this action stems from an ongoing supervisory engagement. We respect the RBI’s decision and are working diligently to address the concerns raised. We understand there may be questions and speculation surrounding this matter. However, we encourage everyone to rely on official communication from the RBI and Paytm Payments Bank for accurate information. We remain committed to acting responsibly as we work to resolve these matters,” Paytm told CNBC TV18.
Several industry watchers CNBC-TV18 spoke to on the condition of anonymity said the RBI action seemed like a precursor to the bank’s licence being revoked. “The RBI may want to give depositors time to withdraw or settle their balances and not want to create panic, so maybe after February 29 we will see what happens to the licence,” a fintech executive said.
While this may well be the end of the road for Paytm’s banking ambitions, its other businesses may also not remain completely insulated.
For instance, Macquarie noted, “The bigger issue is Paytm has not been on the good books of the regulator and going forward, their lending partners also could possibly re-look at the relationships in our view.” The management has already told analysts that the company will not be originating any new loans for the next few weeks as it deals with the issue at hand.
As a payments bank, Paytm cannot lend to customers, but it does tie up with other financial entities that are allowed to lend to originate loans and earns a commission on them. Such banking relationships, often based on trust, may face a hit as lenders may choose to be more careful in engaging with a player that is in regulatory crosshairs.
At the end of December 2023, Paytm had a merchant base of 3.93 crore. It offers them QR codes to accept payments, or code on Paytm Soundboxes which alert merchants of receipt of payments, which are linked to the merchant’s bank account. Many of these merchants have a bank account with Paytm Payments Bank. And Paytm has till February 29 to move all these QR codes to other sponsored banks.
Bhavesh Gupta, president and COO of Paytm, explained to analysts on the call, “The offline merchant where you see a Paytm QR, is powered by Paytm Payment Bank, right? And now that QR has a VPA, a virtual payment admin of the Paytm Payment Bank. So now that QR will have to be changed, the VPA will have to be changed to any other sponsor bank, and we have multiple sponsor banks anyway working with us, large sponsor banks who earlier worked with us, while we predominantly worked in the offline space with Paytm Payment Bank…we basically now have to work in making sure that the VPA is changed to another bank. We have multiple options of the banks that we are currently in conversation with.”
Easier said than done in this case. It might be a logistical nightmare for Paytm to get the merchants to move their bank accounts from PPBL to another bank to be able to continue to receive payments, and this hassle could potentially lead to at least some of these merchant customers to shift to its competitors such as PhonePe, BharatPe, or RazorPay, or other banks.
As for customers, while user-facing UPI payments may not be hit directly, but Paytm currently directly works with its own bank, PPBL, to control its UPI payment journey. With RBI asking the bank to shut down its nodal account, this process may also not be too straightforward. RBI regulations require the setting up of a nodal account by payment players to help safeguard interests of the customers, and ensure that payments made by them using electronic modes are duly accounted for. As per the RBI mandate, the intermediaries receiving online payments need to collect the money in a nodal account, payments to the seller happen from this account without any delay.
With this nodal account cancelled, Paytm will quickly have to set up another nodal account for its payment services to continue at another bank.
Another challenge will be to ensure there are enough liquid assets to meet customers’ requirements. As per sources, Paytm’s customers have a deposit balance of about Rs 3000 crore to Rs 4000 crore across the wallets. With the RBI barring the bank from allowing any more top-ups in wallets and stopping banking activities with effect from February 29, customers would naturally rush to utilise or withdraw this amount, and Paytm will have to ensure it is able to facilitate that without hiccups.
Needless to say, tough days are ahead for the fintech giant. Paytm’s once-celebrated status in India’s digital payment space now hangs in the balance, as founder Vijay Shekhar Sharma navigates a critical period that will determine the company’s future and its ability to reclaim its position as the poster-child of India’s digital payments story.