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The Problem with Paytm Payments Bank: Reason and Repercussion

As far as Indian FinTech startups are concerned, the name of Paytm and Vijay Shekhar Sharma comes first. But today both of them are under the hammer of RBI. By now, you might know what happened with Paytm Payments bank. RBI has prohibited Paytm Payments Bank Ltd from accepting deposits or top-ups in any customer account, prepaid instruments, wallets, and FASTags after February 29, 2024. This deadline is now extended to March 15, 2024 by the RBI. 

The larger question is that, why is the RBI so angry with Paytm? RBI cited the reason of “persistent non-compliance and ongoing supervisory concerns within the bank.” However, there might be more to the story than meets the eye. 

CNBC TV18 released a detailed report explaining other reasons:

  • Out of 35 crore Paytm wallets, 31 crore are inactive. This shows the dire situation of Paytm, which is India’s largest FinTech company. 
  • Hundreds of thousands of accounts were opened without proper KYC (Know Your Customer). 
  • Thousands of accounts were reportedly linked to the same PAN (Permanent Account Number).
  • The financial and non-financial business of Paytm Payments Bank is linked to other companies of Vijay Shekhar Sharma. This is a violation of basic norms of being a bank. 

Some reports are even suggesting possible money laundering through Paytm Payments Bank. However, the company denied any such accusations. But the fact of the day is that there are problems with Paytm Payments Bank and this is not the first time RBI took action on the misconduct of the bank. In fact, the problems started within the first year of the bank’s existence and from that time onwards, the problems of violations, data breaches, lack of transparency and risk of frauds started. Let’s look at the timeline of RBI regulations on the bank:

  • The first strike came in June 2018, when RBI stopped the bank from opening new accounts. Many reasons were given such as violation of licensing conditions, not maintaining the day-end balance and not following the KYC guidelines. This ban was lifted in December 2018. 
  • Then in October 2021, RBI found out that Paytm Payments Bank had submitted wrong information to RBI so a fine of ₹1 Crore was imposed. 
  • In March 2022, RBI imposed supervisory restrictions which again barred them from accepting new customers and system wide audits were done by external firms. This was done because the bank was sharing its servers and physical infrastructure, including people, with its parent company, One97 Communications. There were also reports of non compliance with anti-money laundering laws. 
  • When RBI read the auditor’s report, they again gave a warning in October 2023.

By now, any bank or any company would have done something to make things right but RBI found out that after so many warnings, audits and fines, no action was taken by the company to stop these malpractices:

  • Then in October 2023, RBI imposed a massive monetary fine of ₹5.89 crore. Again the reasons cited included non compliance, and KYC guidelines were not followed. Cyber security incidents were not reported to RBI. The regulatory ceiling was monitored as in some accounts transactions worth crores were going on, crossing the regulatory ceiling. Video based customer identification process or VCIP, was not followed. 

This is what RBI actually meant by “persistent non-compliance.” After so many warnings and actions, the RBI finally took this step. Now, many people are asking what Paytm and its board members were doing. Why were these warnings not taken seriously?  One thing is clear that Paytm’s board and management failed at their duties and now, they will have to pay the price for it.

In addition to the verdict by the RBI, the Confederation of All India Traders (CAIT) issued an advisory on 4th February, 2024 to traders to switch from Paytm to other payment options. “The Reserve Bank of India has imposed certain restrictions, prompting CAIT to recommend that users take proactive measures to protect their funds and ensure uninterrupted financial transactions. Large number of small traders, vendors, hawkers and women are making payments through Paytm and as such RBI restrictions on Paytm could lead to financial disruption to these people,” the Confederation of All India Traders (CAIT) stated.

Further RBI governor, Shaktikanta Das has expressed that there is limited scope for reviewing the actions taken against Paytm Payments Bank. This makes it clear that Paytm Payments Bank will not survive as they will not get the banking licence again. The banking ambitions of Paytm are lost but can Paytm survive without its Payments bank? What will be its plan to profitability now? 

As of now, Paytm is looking at Axis bank for partnership. Anyhow, The road ahead for Paytm will be a tough one. It will be interesting to see if and how Paytm will bounce back. There are many lessons to be learnt from this incident, which we will discuss in our upcoming blog.

Written by

Ganesh Choudhary

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