As a vote-on-account ahead of the general elections, the Interim Budget 2024-25 did not make much of a noise in the Indian business sphere last week. But, what created a flutter was the Reserve Bank of India (RBI) crackdown on Paytm Payments Bank on the budget eve.
On January 31, the RBI virtually halted the operations of this payments bank by imposing significant business restrictions, including a ban on accepting fresh deposits.
What irked the big daddy of banking?
For those unfamiliar with the case, and to simplify the technicalities, the RBI’s action was attributed to repeated non-compliance by the company in three primary areas.
1. Violation of KYC norms: This simply meant that lakhs of bank accounts with Paytm bank didn’t have the account owner’s identity mapped to each account. During its probe, the RBI found that in thousands of cases, the same PAN was linked to more than a hundred customers and, in some cases, the number shot past a thousand. The total value of transactions, running into hundreds of crores of rupees, exceeded regulatory limits in minimum KYC pre-paid instruments, stoking worries over unlawful money laundering practices.
2. Non-compliance with RBI rules: Paytm didn’t adhere to the RBI rules that stipulate an arm’s length between the bank and the parent. PPBL
breached the red line, mixing its financial and non-financial businesses with its promoter group companies. The bank relied on the IT infrastructure of OCL (parent firm), and transactions were routed through the parent entity-owned apps raised serious concerns about data privacy and data sharing, according to a probe by the banking regulator.
3. Lying to regulator on compliance issues: Paytm Payments Bank, according to the RBI, consistently lied to the regulator on its compliance status. On several occasions, the compliance submitted by the bank has been found to be false upon verification by both RBI supervisors and external auditors. Lastly, the bank’s payables to OCL were substantial and not disclosed in the financial statements of the bank, indicating financial irregularities, as per the RBI findings.
A perpetual violator
These were not one-off cases. What irked the banking watchdog even more was repeated non-compliance. These violations had been ongoing for a long time, despite repeated warnings. The Paytm group promoters tested the patience of the regulator, starting back in late 2021 when serious KYC AML (anti-money laundering) violations were observed by the RBI. In March 2022, the central bank imposed supervisory restrictions on PPBL to stop onboarding new customers immediately and to appoint an external audit firm to conduct a comprehensive system audit. Even after the audit outcome was available in late 2022, the bank allegedly didn’t act to the satisfaction of the regulator.
With the RBI finally clamping down on the bank, the future of Paytm Payments Bank in now in limbo. The business of banking works predominantly on trust. Considering the gravity of the regulatory action, banks and customers will think twice before looking at Paytm Payments Bank again. It will be a hard task for Vijay Shekhar Sharma and his team to undo the damage.
After the RBI action, there has been criticism from a section of the fintech industry blaming the regulator for killing fintech innovation. The central bank’s primary responsibility is to safeguard depositors by ensuring banks, as guardians of public deposits, operate under the set framework. If you are blaming the regulator for the action on Paytm bank, the joke is on you!
Heat on Paytm Bank Board
The role of the Paytm Bank Board, particularly that of independent directors, in this whole mess needs to be questioned. In a banking entity, for that matter, any entity, the Board holds the supreme responsibility in guiding the company and ensuring that the golden standards of corporate governance are followed in letter and spirit.
Did the Paytm Bank Board fail to do its duty? What kept the independent directors silent when the bank went on defying RBI alerts? What morale did the board set while giving fake compliance reports to the regulator again and again? Questions are frothing up in scores.
Led by Chairman Vijay Sharma, Paytm Bank’s nine-member Board is filled with veterans from the financial sector, with at least two of them having experience in leading compliance functions at large international banks. Also, a majority of them have experience of 35-40 years in their respective fields of expertise.
The Boats boasts of names such as former Punjab and Sind Bank executive director AK Jain, former Accenture India managing director Pankaj Vaish, former SBI deputy managing director Manju Agarwal, former bureaucrat Ramesh Abhishek, former Bank of America Merrill Lynch country compliance head Shinjini Kumar, former BRICS bank compliance head Srinivas Yanamandra, former IDFC Bank and ICICI Bank executive Bhavesh Gupta, and former StanChart and HDFC Bank executive Surinder Chawla.
What is the Process?
The Paytm Board had enough time to identify the risks of non-compliance and act to avoid a future crises. As per the process, once a year, an onsite inspection of a particular bank in question is done based on its latest audited balance sheet. The inspection report is then provided to the bank under acknowledgment, thus giving timelines for compliance. The inspection report is placed before the audit committee of the Board (ACB) and the board of the bank. The Board, through ACB, monitors the progress of compliance. In case of penalties or strictures by the regulator, the Board has to crack the whip to get things done to meet the regulatory compliance.
Were these processes followed and translated into corrective action? Answers are blowing in the wind.
The early warning signals came way back in 2021, and everyone on the Board knew what was going on. In hindsight, it appears that the Paytm Board did not act on the warnings and failed to do its primary duty. This episode highlights the critical duty of bank Boards, especially that of independent directors, in fixing non-compliance, instead of being just mute spectators—something RBI brass has been highlighting for a while.
Banking Central is a weekly column that keeps a close watch and connects the dots about the sector’s most important events for readers.
