Paytm Payments Bank and RBI ban: What went wrong and the story so far

RBI Paytm Payments Bank news: After the ban announced on January 31, the shares of One97 Communications Ltd have fallen over 43% and are near their all-time low

The shares of Paytm have plunged 43 per cent since January 31. Its shares are trading near an all-time low of Rs 438.35 apiece. The sell-off started after the Reserve Bank of India (RBI) barred Paytm Payments Bank Ltd (PPBL) from accepting more deposits from February 29, owing to "persistent non-compliances".

On Tuesday morning, the shares of Paytm were trading over 4 per cent in the green at Rs 456.15 apiece.

The order meant that PPBL would not be able to undertake any banking activity, including accepting deposits, credit transactions, wallet top-ups (not even form FASTags) and bill payments.

Later, on February 2, a report by Bloomberg stated that the RBI is also considering cancelling Paytm Payments Bank's operating license as early as next month once the depositors are safeguarded.

Also Read: On Paytm crisis, startup founders write to PM, RBI to review curbs: Report

"No final decision has been reached as yet and the RBI's thinking may change based on Paytm's representation," the report added.

What is Paytm Payments Bank?

Paytm Payments Bank Ltd (PPBL) is an associate of One97 Communications Limited (OCL). The majority of shares in the company, 51 per cent, are held by Vijay Shekhar Sharma and One97 Communications holds the remaining 49 per cent.

The PPBL started its operations on May 23, 2017. It offered digital banking, including savings accounts, current accounts, fixed deposits with partner banks, and balance in wallets, UPI, and FASTag, among other services.

According to the rules of the payment banks, these cannot lend any money and can accept deposits only up to Rs 2,00,000.

Paytm Wallet also comes under the ambit of PPBL. According to RBI's provisional data for December 2023, Paytm Wallet users carried out 247.2 million transactions worth over Rs 8,000 crore for the purchase of goods and services while 20.7 million transactions were carried out for transferring over Rs 5,900 crore.

How will the RBI order impact the customers?

The customers will not be able to deposit or top-up their customer accounts, wallets, FASTags and other instruments after February 29. However, withdrawal or utilisation of balances by its customers from their accounts, including savings bank accounts, current accounts, prepaid instruments, FASTags, and National Common Mobility Cards, are permitted without any restrictions up to their available balance.

Paytm Wallet users can continue to carry on transactions till February 29. However, after February 29, they will be able to use their existing balance till it is exhausted and not add any money to their account.

The same rule applies to PPBL accounts, Paytm wallet-linked services like FASTag, and National Common Mobility Card that are used for travel in metro and other public transport.

For how long has Paytm Payments Bank been under the RBI lens?

The banking regulator had been frequently flagging off issues.

In 2018, the RBI temporarily halted the opening of new accounts in PPBL owing to violations in licensing conditions and non-compliance with Know-Your-Customer (KYC) norms. Later, in 2021, RBI said it had uncovered that PPBL submitted false information. It was fined Rs 1 crore.

On March 11, 2022, the RBI barred PPBL from onboarding new customers with immediate effect.

"The bank has also been directed to appoint an IT audit firm to conduct a comprehensive system audit of its IT system. Onboarding of new customers by Paytm Payments Bank Ltd will be subject to specific permission to be granted by RBI after reviewing the report of the IT auditors. This action is based on certain material supervisory concerns observed in the bank," the RBI said in a notification on March 11, 2022.

By October 2023, the RBI imposed a penalty of Rs 5.39 crore on PPBL for continued non-compliance with KYC norms.

Now, reports suggest that money laundering concerns and questionable dealings of hundreds of crores of rupees between popular wallet Paytm and its lesser-known banking arm had led RBI to clamp down on Vijay Shekhar Sharma-run entities.

The fintech major has, however, clarified that there are no investigations for foreign exchange violations against it.

A report by PTI recently added that PPBL had lakhs of non-KYC-compliant accounts, and in thousands of cases, single PANs were used to open multiple accounts.

How has Paytm responded?

Paytm said that it is in discussion with the RBI to comply with their directions. Moreover, it said that its financial services, such as loan distribution, insurance distribution and equity broking, are not in any way related to PPBL and are expected to be unaffected. The company also said it would "accelerate" its relationship with other banks for the continuation of services.

The company's offline merchant payment network offerings like Paytm QR, Paytm Soundbox, and Paytm Card Machine will continue as usual, where it can onboard new offline merchants as well.

However, it sees an impact of Rs 300-500 crore on its annual operational profit.

Is the company selling its wallets business?

Media reports also suggested that the company is looking to sell its wallets business, and HDFC Bank and Mukesh Ambani's Jio Financial Services Ltd (JFSL) are the frontrunners to acquire it.

JFSL has now denied the reports. Paytm has also clarified that it is not in any taks for the same. HDFC Bank has not said anything on the matter so far.