– By Ankita Hariramani

Paytm Payments Bank (PPBL), the banking arm of India’s beloved fintech Paytm, has been set ablaze by the RBI vide a recent press release dated 31st January 2024 directing PPBL to cease its operations by 29th February 2024. Though the RBI’s actions seem unprecedented, it was perhaps time for a serious intervention given that the RBI offices have been signaling risks and non-compliances for quite some time now.

While Paytm’s management has been assuring its stakeholders of its roadmap towards smooth transition and business continuity, the recent resignations from PPBL’s board just days after the RBI embargo on its banking operations seem to be another signal of a governance failure in PPBL. Though a group-level advisory committee has been formed by One97 Communications Limited (OCL), the flagship listed entity in the Paytm group which owns and operates the Paytm platform, perhaps it’s a touch tardy, considering the numerous warnings and ultimatums issued. It is also pertinent to note that the group-level advisory committee has been formed to strengthen compliance for OCL and not to rectify and fix the faults that led to the PPBL fiasco.

ALSO READ

RBI suspends Mastercard, Visa’s card-based commercial payments

HDFC Bank most profitable firm in Apr-Dec

‘Already provided for 89% of the claim amount’

No scope for complacency: RBI governor tells banks

Banking business attracts thorough regulatory involvement and intense supervisory oversight. Despite the stringent requirements, it appears that since inception, PPBL has consistently failed to comply with multiple RBI guidelines and has even been ordered to stop customer onboarding twice (via an internal RBI communication in 2018 and then via a public press release in 20222).

PPBL has also been charged with a penalty of Rs 5.39 crores in 2023 for non-compliant banking practices in addition to an Rs 1 crore penalty that was levied in 2021 for submission of incorrect information. The non-compliances primarily pertain to the violation of multiple RBI guidelines on KYC norms, cyber security reporting, mobile banking, risk profiling, monitoring of transactions, etc. A continuous breach of the KYC norms has also raised concerns and risks of money laundering. What’s astonishing is that despite the nine-member board with an established banking record, the PPBL management ignored the continuous RBI warnings.

One wonders whether the consistent non-compliant practices were the sole reason for the embargo or whether this drastic measure is a result of a scrutiny that confirmed excessive intra-group dependencies and non-independent transactions. The RBI guidelines require that the financial and non-financial services activities of the promoters, if any, should be kept distinctly ring-fenced and not commingled with the banking and financial services business of the payments bank. However, with OCL holding 49% shareholding in PPBL (remaining 51% held by OCL’s MD) and OCL’s Paytm app being the only gateway to PPBL’s services4, the commingling of banking and other group operations perhaps could have been another trigger mandating an action of this sort by the regulator.

While everyone eagerly awaits the detailed FAQs that are expected to be issued by the RBI in the interest of customer protection, PPBL’s flagship product Paytm wallet (with a user base of 300 million+) seems to be the most impacted since it cannot be offered by other Paytm group entities without applying for a fresh RBI licence. Other offerings such as UPI payments and bill payments also face operational challenges and a smooth transition within a short time depends on the willingness of other banks to partner with Paytm.

Balancing financial innovation and inclusion with sound banking practices is crucial. Yet, it’s essential to recognise the significant impact that trailblazers such as Paytm have on propelling the digital economy, influencing market penetration, and shaping the economy’s reliance on them. The regulator clearly does not seem keen on providing yet another extension or any regulatory relief to PPBL. With two weeks at hand, it will be intriguing to see if Paytm can successfully navigate this transition, or if other contenders will seize the opportunity to capitalize on the situation.

(Ankita Hariramani is the Counsel at Spice Route Legal.)

(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)