The issue with Paytm Payments Bank: Explained

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• The issue with Paytm Payments Bank: Explained

The issue with Paytm Payments Bank: Explained

Paytm Payments Bank (PPBL) has been in multiple news headlines ever since the Reserve Bank of India (RBI) decided to bar it from obtaining further deposits and top-ups in its accounts or wallets. Paytm Payments Bank is not the same as Paytm, but it is its subsidiary. Paytm was established in 2010, as a multinational Financial Technology Company that specializes in digital payments and financial services. Whereas, Paytm Payments Bank is a Payments Bank or a ‘differentiated bank’ which was established in 2017 and received the status of a scheduled bank from the RBI in 2021.

On March 11 2022, The RBI ordered PPBL to put a halt on onboarding new customers with immediate effect. On January 31 2024, the RBI imposed operational restrictions on PPBL due to persistent non-compliance issues and continued material supervisory concerns.

According to sources, hundreds of PPBL accounts were created without a proper process for identification. Moreover, these accounts with improper Know-Your-Customer (KYC) are said to have conducted transactions amounting to crores on the platform for alleged money laundering.

Instructions given by RBI to PPBL

The power of issuing Payments Bank License lies with the RBI. The government authority can fine or penalize the Payments Banks and direct them to halt their operations partially or completely if they do not abide by the laws. RBI can also revoke the license of the offenders.

Starting from February 29, the RBI has forbidden PPBL from accepting additional deposits, top ups or credit transactions into its digital wallets or accounts under section 35A of the Banking Regulation Act, 1949. This ban also extends to its prepaid instruments for FASTags and National Common Mobility Cards (NCMC) cards. However, existing customers would be allowed to use their existing balances to avail the services. According to Australia-based firm Macquarie Capital, PPBL houses over 330 million wallet accounts of its parent company One97 Communication (OCL) and functions as a repository for transactional funds.

PPBL has been banned from carrying out any banking services such as AEPS, IMPS, bill payments and UPI. It has been directed to close the nodal accounts of its parent company and Paytm Payments Services latest by February 29. A nodal account is an account created for the special purpose of receiving money from participating banks and remitting it to specific merchants. This type of account is created as per 'the guidelines of the nodal accounts' stated by RBI.

Furthermore, RBI has asked PPBL to settle all the transactions of such accounts by March 29. No further transactions will be allowed after this date. Since there does not seem to be any solution in the near term, there are rumors that RBI is indirectly canceling the PPI license of Paytm. The fintech giant expects the latest move by RBI will impact the annual EBITDA (earnings before interest, taxes, depreciation, and amortization) by ₹300 to 500 crores.

Previous decisions taken by RBI against PPBL

Paytm Payments Bank has been under the surveillance of RBI time and again.

• On June 19, 2018, when the regulator prohibited the Payments Bank from opening any new accounts and wallets with effect from June 20, 2018, due to supervisory concerns. This ban was lifted by RBI on December 27, 2018, with effect from December 31, 2018.
• In 2021, RBI slapped Rs 1 crore penalty on PPL for submitting false information. There were also allegations that the payments bank had failed to meet the Rs 100-crore paid-up capital criteria. 
• In March 2022, RBI ordered PPBL to halt onboarding new customers with immediate effect.
• In October 2023, faced a fine of Rs 5.39 crore for its failure to comply with KYC norms, regulatory breaches, and data sharing problems. 

Conclusion

When the concept of Payments Bank was introduced in India in 2014, it received mixed opinions from the masses. The business model was vague but the rules seemed really strict while the profitability margin seemed low. As a result, out of 11 successful applications that acquired the Payments Bank License in 2016, only 8 decided to actually use it. Paytm Payments Bank is one of the 6 Payments Banks that are currently operational in the country. It was the first one out of all the payments banks to turn profitable. Now, in the current scenario, it is on the verge of shutting down due to non-compliance with RBI’s rules and regulations. 

Paytm Payments Bank is not the only payments bank that has been under RBI’s lens. In 2018, Fino Payments Bank received a fine of Rs 1 crore. The same year, RBI slapped a fine of ₹5 crore on Airtel Payments Bank for violating the apex bank's operating guidelines and KYC (know your customer) directions. In 2020, RBI imposed a penalty of ₹1 crore on the bank for delay in applying for the re-appointment of Managing Director and CEO. 

The Payments Banks are under RBI’s lens every once in a while. After seeing the downfall of Paytm Payments Bank, will the customers have faith in other Payments Banks? Payments Banks already have their own drawbacks such as not providing loans and many other facilities that traditional banks can. So why not just stick to the traditional banks? Do other players need to enter the Payments Banks industry and show the existing players how it’s done? 

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