RBI bars Paytm Payments Bank from offering services effective March 2024!

From various news articles & an article from The Ken

Here's a quick summary n the most heated topic for the day:

The Reserve Bank of India (RBI) has imposed restrictions on Paytm Payments Bank, prohibiting it from offering incremental banking services starting March 2024 due to concerns about regulatory compliance breaches.

The action follows persistent non-compliances and supervisory concerns identified in comprehensive audits. This action follows the central bank's earlier ban on new customer onboarding and the directive for comprehensive IT system audits in March 2022.

While the focus of the regulatory concern is primarily on Paytm's parent company, One97 Communications Ltd (ONCL), which owns 49% of Paytm Payments Bank, it is the bank that faces the consequences of the RBI's measures.

What is allowed & What is not?

• Paytm Payments Bank is barred from accepting deposits, conducting credit transactions, or top-ups in various accounts and instruments post February 29, 2024. 
• Additionally, the nodal accounts of One97 Communications and Paytm Payments Services must be terminated by February 29, 2024, with the settlement of pipeline transactions completed by March 15, 2024. No further transactions will be allowed after this date.
• The RBI also prohibits the facilitation of any transactions, including immediate payment service, Aadhaar-enabled payment system, and unified payments interface (UPI). 
• However, it must allow withdrawals and utilization of balances without restrictions. 
• The bank can credit interest, cashbacks, or refunds at any time. 
• After February 29, 2024, only fund transfers, withdrawals, and utilizations will be permitted, excluding other banking services, BBPOU, and UPI facilities.

The effect...

• The regulatory action impacts Paytm Bank's 300 million wallets, 30 million bank accounts, 1.6 billion monthly UPI transactions, and eight million Fastags. 
• The company estimates a potential worst-case impact of Rs. 300 to 500 crores on its annual EBITDA due to these developments but expresses the intention to improve profitability. 
• Paytm Payments Bank faces a tight deadline, with services set to be history on February 29. The banking regulator's directive not only impacts Paytm's bread-and-butter payments business but also poses challenges for users and merchants. 
• UPI transactions through @paytm handles will cease, affecting both consumers and merchants using Paytm QR codes. Paytm must swiftly transition its nodal accounts to another bank, with Yes Bank and ICICI Bank as likely candidates. 

Payments Bank in general…

RBI has imposed new restrictions on Payments Banks, limiting them to accepting deposits and prohibiting them from providing loans unless in partnership with another regulated lender. 

They are allowed to issue debit cards but not credit cards unless under a co-branded or co-lending arrangement with a partner bank or NBFC. 

Paytm Timelines…

2015: Paytm received RBI’s in-principle approval for payments bank license

2017: Paytm Payments Bank commences operations

2018: RBI bans it from onboarding new users for accounts ands wallets

2019: Ban is lifted

2021: Gets included in the list of Scheduled Banks

2022: RBI directs them to stop onboarding new customers and conduct a comprehensive IT system audit. Also RBI rejects PayTm Payment Services’ payment-aggregator license application 

2023: RBI imposes Rs. 5.4 cr penalty on Paytm payments bank for KYC non-compliance

2024: RBI directs paytm payments bank to terminate nodal accounts by Feb'24

What led to the RBI’s decision:

1. Large number of frauds & complaints:

Complaints against PayTm Payments bank increased by nearly 6x from FY 19 to FY23

2. Extensive entanglement

- Paytm Payments Bank is facing an uncertain future following extensive entanglement with its parent company, Paytm. 

- RBI’s audit report in October 2022 highlighted the need for strengthening IT systems and emphasized the necessity for the bank to disentangle from its close ties with Paytm. This entanglement was significant, with operations, access, registration, and promotion all exclusively linked to the Paytm app. Users struggled to distinguish between Paytm and Paytm Payments Bank services. 

- So, in the app updates in late 2023, it tried to bring a better demarcation of who is selling what products. It made changes to the top grid of the app, which is prime real estate. That’s where it earlier showed personal loans, postpaid, which were lending products and not related to the bank.

The directive to terminate nodal accounts is seen as an attempt to end this interdependence. The RBI's concerns extend to products like Paytm Postpaid, a buy-now, pay-later facility prone to fraud and customer complaints. 

Path for Paytm:

• OCL, distancing itself from PPBL, announces plans to expand relationships with other banks and move away from PPBL, emphasizing its commitment to merchant services and online payment solutions. 
• The nodal accounts of OCL and Paytm Payments Services Limited (PPSL) will be shifted to other banks by February 29, 2024. 
• OCL's other financial services such as loan distribution, insurance distribution, and equity broking are expected to remain unaffected. 
• To save its UPI operations, Paytm needs to become a third-party application provider (TPAP) by partnering with multiple banks within a month, a challenge given its current banking status. 
• Users paying loan EMIs through Paytm Payments Bank will face changes from March 1, and Paytm must navigate these challenges to secure its survival. 
• The payments bank model was inherently challenging, and Paytm's aspiration to become a small finance bank faced hurdles, leading to its current predicament. 

While Paytm has announced its decision to work exclusively with other banks, distancing itself from Paytm Payments Bank in the next phase, the fate of Paytm Payments Bank hangs in the balance, with 29 days left for its promoter, Vijay Shekhar Sharma, to navigate through the challenges and ensure Paytm's survival.

The regulatory overhang is considered a negative development, with potential impacts on payments margin, lending business, and higher-margin products like wallets and FasTag. Such drastic moves by the regulator may also impact the faith of the banks in other fintech companies creating a negative sentiment in the industry overall.