Why RBI Banned Paytm Payments Bank And What It Means For Paytm's Future?

Paytm's stock prices are plummeting amid turmoil sparked by its lending division. In response to a notification from the RBI on January 31, 2024, Paytm Payments Bank Ltd. (PPBL) was directed to suspend all its major banking services. This notice issued by the central bank indicated a report by external auditors, flagging persistent non-compliance issues and continued material supervisory concerns within the bank.  

What were the imposed restrictions?

The restrictions imposed on the lending arm encompass a suspension of deposits, credit transactions, fund transfers, and top-ups. Services, like repaid instruments, wallets, FASTags, and National Common Mobility Cards, will also face a pause in operations. However, interest, cashback, and refunds will still be credited, with accounts remaining accessible solely for withdrawals or usage.

Banking services like bill payments and UPI, will cease in the upcoming month. Nodal Accounts managed by the parent company, OCL, and Paytm Payments Services will be closed by February 29, with all pending transactions and nodal accounts settled by March 15.

What caused these regulatory woes?

While the lending arm has been granted a one-month period to cease operational services, this isn't the company's first brush with regulatory concerns. 

Since the inception of PPBL in 2017, regulatory issues have plagued the company's journey repeatedly. From failing to comply with KYC guidelines to suspending the creation of new accounts, Paytm has faced several regulatory hurdles. The recent RBI notice specifically mentioned non-compliance and supervisory concerns. Paytm indicated that it anticipates a potential worst-case impact of Rs 300 to Rs 500 crore on its annual EBITDA moving forward.

Paytm Vs. PPBL (Paytm Payments Bank Ltd.)

The news didn't sit well with the markets, as evidenced by the stock plummeting nearly 20 per cent the following day. Vijay Shekhar Sharma had to step forward to clarify that the imposed restrictions only affected the lending arm, not Paytm itself. 

PPBL, in which Paytm holds a 49 per cent stake, while Shekhar owns the remaining 51 per cent, acts as a banking partner for Paytm. It securely holds funds deposited in Paytm's digital wallets.

Users of the Paytm wallet can continue the usage of their current balance. However, they won't have the option to recharge their accounts with additional funds.

Divided Netizens

A few days following the RBI's notice, BharatPe founder Ashneer Grover took on X that actions of this nature could ultimately dismantle India's fintech sector within the startup domain.

"Startups have been biggest creators of market cap and employment in last decade. Today IIM and IIT are struggling to place people - we as a country cannot afford such overreach!" Grover said.

"Tom-Tom-Ing UPI to the world and punishing pioneers in the space is pure Doglapan," he further said.

However, other netizens were quick to contradict. Constructing businesses without regulatory frameworks in place is unrealistic. While innovation is crucial, it shouldn't involve disregarding laws and regulations in the pursuit of business expansion.

What's now for the company?

PPBL has paused its primary services like deposits and credit transactions, fueling concerns about layoffs in the company. However, in a report by moneycontrol, Vijay Shekhar Sharma reassured the employees of the lending arm that there would be no job cuts. He further said that there are ongoing discussions with the RBI and other bank partnerships.

As the company continues to encounter challenges, people may seek alternatives in the digital payment space, yet the debate over loosening regulations for fintech space remains a headline question.