The Reserve Bank of India has announced it is taking measures against Paytm Payments Bank, the banking arm of the country’s Paytm mobile payments service.
In the announcement, RBI said an audit by external auditors found non-compliances that needed further supervisory action, and “material supervisory concerns” within the bank.
While the action has been swift, the actual reasons for the move have not been made explicit.
Shantanu Singh, research fellow at the India Observatory of the London School of Economics, says: “The RBI notification isn’t very clear, with vague wording around mismanagement and misgovernance. They haven’t disclosed what is in the audit report.”
However, Pratik Dattani, founder of UK-based think-tank Bridge India, says there have been at least five warnings in the past around the close operations between PPB and Paytm.
“An audit by the RBI found that data traffic and money were flowing between the two regularly, which created both accounting and supervisory problems for the regulator,” says Dattani. “The same management team ran both businesses, which caused potential for conflicts of interest.”
Following the RBI announcement, the payments side of Paytm has been clear to distance itself from PPB, with founder and CEO Vijay Shekhar Sharma stating that the payments provider will work with other banks. The financial operations of the two may need some untangling.
“Paytm is a minority shareholder in PPB, but the remainder of the shares are owned by the founder of Paytm,” says Singh. “It’s unclear [what] the debt relationships between the two [are], but per the statement of the owner of One97 Communications, they have made clear they have nothing to do with it and can move on to other banks.”
The measures from RBI have restricted the bank from onboarding new customers and limiting the amount customers can send or receive from their accounts to February 29. All pipeline transactions are to be completed by March 15. All credit services are to be stopped.
PPB has 300 million wallets and 30 million bank accounts in use in India. With a goal to “to empower unbanked and underbanked Indians”, the bank claimed to add 400,000 customers a month.
Singh says: “It is not good news for the bank’s customers. The bank will not be able to come back from this, but they have been able to avoid a bank run, allowing customers to withdraw funds for the whole of February.”
The news is not the first time that PPB has experienced issues with the central bank. “Paytm Payment Bank has been struggling with RBI,” says Singh. “They had issues with not following regulations closely enough, and controversy around funding by Alibaba, which put the bank in the spotlight.”
Alibaba had pulled its involvement with Paytm in February 2023, selling its remaining shares for Rs13.7bn ($165mn). RBI had prevented PPB from onboarding new customers in 2022 after it was found PPB had allowed data to be moved to servers outside India, and had not carried out full verification checks on customers.
Regulatory response
The speed of the action from the regulator has raised some questions about their reaction.
“The move has sent shockwaves throughout the fintech industry in India, as Paytm was one of Digital India’s real pioneers,” Dattani says. “The aggressiveness of the regulator’s action is in sharp contrast to how it has acted against similar issues at traditional banks in the recent past.”
Wasim Ahmad, associate professor in the Department of Economic Sciences, Indian Institute of Technology Kanpur, says: “The decision on Paytm has been taken considering the animal spirits of fintech start-ups in India. RBI can be criticised for not putting enough sandboxes on fintech expansion, but the recent measures undoubtedly set a benchmark for other start-ups to follow the central bank regulations.”
Singh adds: “From our research with fintech entrepreneurs, we hear that RBI rules are forward-looking; they tend to be arbitrarily enforced. It’s a continuation of the regulatory behaviour we have seen in the past.”
While customers have been reassured they can still use Paytm and their PPB accounts for the meantime, Dattani cautions it may cause a loss of consumer confidence in their equity broking and insurance services.
Consumer confidence in mobile banking services is likely to remain, as Dattani notes it is a “robust, homegrown” ecosystem. It is possible consumers may turn to competing services including PhonePe and Google Pay.
“Paytm deserves credit for playing a big part in moving India towards a digital ecosystem after demonetisation, but it seems not to have paid heed to the regulator’s demands in recent times, for which it is now paying the price,” adds Dattani.
