RBI mulls revoking Paytm Payments Bank licence or superseding board

Action may come once pipeline transactions settled

After issuing directions under Section 35A of the Banking Regulation Act, 1949, the Reserve Bank of India (RBI) is considering either cancelling the licence of Paytm Payments Bank (Paytm PB) or superseding its board after the settlement of all pipeline transactions and nodal accounts are completed by March 15, sources said.

The payments bank has been found in violation of several norms, including know your customer (KYC) guidelines, which prompted the regulator to order the lender to stop deposits or credit transactions after February 29, 2024.

The RBI has asked Paytm PB to settle all pipeline transactions and nodal accounts by March 15, 2024, and said no further transactions should be permitted thereafter. On January 31, the RBI said no deposit or credit transactions or top-ups will be allowed in any customer accounts, prepaid instruments, wallets, FASTags, etc. after February 29.

In case the board is superseded, sources said, an administrator is likely to be appointed which will be accompanied by a group of individuals to assist the administrator to discharge his or her duty.

“Given the provisions of the Banking Regulation Act that have been used in this case, it is only logical that the board will be superseded or the licence will be cancelled. It is a matter of time,” said a source.

In March 2022, the regulator had barred Paytm PB from taking in new customers. The company, in which parent One97 Communications (OCL) holds a 49 per cent stake (rest 51 per cent is owned by Vijay Shekhar Sharma), was at that time asked to appoint an external auditor to check its information technology systems. The RBI noted that the issue of non-compliance was persistent that warranted further supervisory action.

In earlier instances, the Section 35A of the Banking Regulation Act was invoked while putting a moratorium on YES Bank, which was followed with the change in promoter. The Act was also used for Punjab and Maharashtra Coop Bank, which was also put under moratorium and later assets were transferred to a newly formed small finance bank.

The Act empowers the RBI to prevent affairs of any bank that is seen as detrimental to the interest of the depositors, and secure proper management in the bank.

Sources also said Paytm PB was in discussion with other banks for handling of the nodal accounts. They said banks would not need any regulatory approval for taking over those accounts since it is a business decision of a particular lender.

One of the reasons for the RBI action on Paytm PB was non-compliance of several norms for an extended period. It was found that KYC compliance was not done in a large number of accounts running into lakhs, PAN validation failures, and, importantly, there were thousands of cases where a single PAN was linked to over 100 customers, and in some cases more than thousand customers. All those exposed customers to risk.

Another key concern of the regulator with Paytm PB was it was not maintaining arm’s length with the promoter, OCL.

It was alleged that Paytm PB’s financial and non-financial business was co-mingled with its promoter group companies, which was in violation of licensing conditions. The payments bank was totally dependent on OCL’s IT infrastructure and there was no operational segregation, which raised serious concerns on data privacy and data sharing since many transactions were routed through OCL-owned applications.

What next
 

 After board is superseded, an administrator may be appointed, accompanied by a group of individuals to assist
 

 Paytm PB in discussion with other banks for handling of nodal accounts
 

 Banks will not need regulatory approval for taking over those accounts