RBI Suspends Paytm Payments Bank’s Core Services

Reserve Bank of India (RBI) has barred Paytm Payments Bank from onboarding new customers and offering services like digital wallets and UPI transactions from March 1, 2024. This effectively cripples most operations of the payments bank. As per the RBI directive, Paytm Payments Bank cannot offer services like accepting fresh deposits, issuing credit and debit cards, opening current and savings accounts, and providing payment aggregator services. It also cannot enable transactions via UPI, IMPS, NEFT, RTGS or issue FASTags and Rupay cards.

The bank can only allow withdrawals from existing accounts and balances. All pipeline transactions initiated before March 1 should be settled by March 15.

Background

• With over 100 million KYC-verified users and 8 million FASTags issued, a large customer base will be impacted. However, customers can withdraw their account balances without restrictions.
• Though the exact reasons are unclear, media sources suggest RBI had concerns regarding KYC compliance, IT systems, and data sharing with Chinese investors. Paytm Payments Bank has earlier faced scrutiny since 2018 over processes for user onboarding, KYC norms, maintaining arm’s length from the promoter entity, and meeting the net worth criteria.
• In October 2022, RBI had imposed a Rs 5.4 crore penalty on Paytm Payments Bank for non-compliance related to identifying beneficial owners, monitoring suspicious transactions, and cyber security incident reporting delays.
• In March 2022, RBI had ordered stopping onboarding of new customers due to persistent non-compliance and material supervisory concerns.
• RBI has been wary of Chinese investments in Paytm since Ant Financial, an Alibaba affiliate, holds around 10% stake in One97 Communications, the parent firm of Paytm Payments Bank.
• With India-China tensions, Chinese investments have faced increased scrutiny. Paytm was unable to address RBI’s concerns over data access by Chinese shareholders.

Impact on India’s Fintech Sector

As a poster boy of India’s fintech revolution, Paytm was one of the biggest beneficiaries of demonetization in 2016. It pioneered digital payments in India. However, the RBI action represents tightening regulation for the fintech sector. Other firms will also face increased scrutiny and need to ensure full compliance. The Paytm saga is a reminder that growth with weak foundations cannot be sustained. This will push fintech firms to strengthen their risk management, compliance and corporate governance.

Category: Economy & Banking Current Affairs - 2024