RBI Crackdown on Paytm, Deets Inside

Financial News: Paytm Payments Bank has been ordered by the RBI to halt the onboarding of new customers immediately. Due to likely gaps in its technology systems, the central bank barred SoftBank-backed Paytm Payments Bank from adding new customers on Friday, potentially stifling its small finance bank ambitions and further riling investors sceptical of the fintech's ability to boost earnings after an expensive initial share sale.

The central bank said in a statement late Friday that "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." "This action is based on certain material supervisory concerns observed in the bank."

"We assure you that the recent RBI direction will not impact our existing customers in any way and they can continue to use our banking services seamlessly. We are taking the necessary steps to comply with the directions of the RBI and are committed to minimising any inconvenience caused to our customers," said a Paytm Payments Bank spokesperson in response to media queries.

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Action Following Several Rounds Of Communication

Paytm Payments Bank joins a growing list of financial institutions and lenders that have been sanctioned for non-compliance and system flaws, including Mastercard, Diners Club, American Express, and HDFC Bank. In India, where transactions are increasingly done digitally, the banking regulator is keen on establishing a foolproof payments system.

In a short communication, the RBI asked Paytm Payments Bank to appoint an IT audit firm to perform a complete audit of its IT infrastructure.

"The RBI action is a result of a series of compliance and regulatory issues with Paytm. This includes 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 communication with Paytm, and it has been taken to pinch them hard so that they comply."

Paytm Payments Bank is a joint venture between Vijay Shekhar Sharma, the founder of Paytm, and One97 Communications, the business that owns Paytm. Sharma owns 51 per cent of the bank in his capacity.

Ops Started In 2017

According to its website, it began operations in 2017 and claims to have 60 million bank accounts, with 400,000 new customers added every month. With over 8 million FASTag units issued to date, it is also one of the largest issuers of the FASTag system for highway toll payments.

Paytm is facing a regulatory ban for the second time. RBI has made certain observations concerning the company's methods for acquiring new users in June 2018, particularly concerning know-your-customer (KYC) regulations.

In response to a public interest enquiry, the RBI stated that Paytm had broken the KYC rules, resulting in the ban. According to the RBI's response to the RTI (right to information) request, Paytm also failed to maintain the end-of-day balance restriction of Rs 100,000 per account.

Licence For A Small Finance Bank

Paytm's efforts to transform into a small financing bank were dealt a major setback by Friday's regulatory decree (SFB). In August of this year, Paytm planned to seek a small finance bank licence. Paytm has had multiple rounds of conversations with the central bank over the SFB licence in the past, having openly stated its desire to become an SF.

Since its initial public offering, Paytm has lost over two-thirds of its value, and its market capitalization has dropped to just over Rs 50,000 crore from nearly three times that during the IPO.

According to Ashvin Parekh, a banking consultant and RBI watcher, the central bank's action indicate that non-compliance has consequences.