What triggered the shock move against Paytm bank?

Shares of One97 Communications, the bank’s parent, fell 20% each on both days after the Reserve Bank of India (RBI) prohibited it from most banking activities. The central bank said an audit had revealed “persistent non-compliances” and “continued material supervisory concerns” at the payments bank.

There were four primary issues at Paytm Payments Bank that triggered the RBI action, the person cited above said. First, the bank falsified compliance on issues pointed out by the regulator, meaning it claimed to have rectified the flaws without actually doing so.

“When RBI found KYC violations in 2021, the bank did not make the necessary changes and also presented inaccurate compliance reports which subsequently led to restrictions on adding new customers in March 2022,” the person cited above said on condition of anonymity.

This was followed by RBI slapping a ₹5.39 crore penalty on the bank for non-compliance with some provisions of KYC (know your customer) guidelines and cybersecurity framework.

Second, Paytm Payments Bank did not conduct KYC for a significant section of its customers, and there were instances of a single PAN (permanent account number) — an identity document issued by the income tax department — being linked to hundreds of customers.

Third, the non-financial and financial businesses of the payments bank were closely intertwined with that of the promoter group of companies. This, the person cited above said, was against the conditions prescribed by RBI in its licence to Paytm Payments Bank.

Fourth, the lender is said to have not disclosed payables to its parent entity One97 Communications Ltd.

A spokesperson for Paytm Payments Bank said the latest RBI direction is part of the ongoing supervisory engagement and compliance process. “The bank always upheld compliance with supervisory instructions in its interactions with regulator from time to time. We therefore request you to be guided by the press release of RBI dated January 31 and refrain from any further speculation,” the spokesperson said in an emailed response.

Paytm Payments Bank also allowed some customers to keep more than ₹1 lakh in their accounts, the maximum permitted by the regulator at that time, the person added. The bank, which started operations in 2017, broke this rule within a year, they said. The ceiling was raised to ₹2 lakh in 2021.

Introduced during the tenure of former RBI governor Raghuram Rajan, payments banks aim to reach the under-banked and unbanked population. However, they cannot lend.

On Wednesday, RBI clamped down under Section 35A of the Banking Regulation Act. The section relates to the central bank’s power to issue directions in public interest or to prevent the affairs of any bank being conducted in a manner detrimental to the interests of the depositors, besides others. Following RBI action, several startup founders rallied behind Paytm, saying that such regulatory strictures could sound the death knell for fintechs.

“RBI’s actions cannot be seen as detrimental to fintechs. It should be seen as the regulator stepping in to protect deposit interest,” said one of the people cited above.

On Friday, the market capitalization of One97 Communications stood at ₹30,941 crore, after its shares closed at ₹487.2 on the National Stock Exchange (NSE). On 24 November, 2022, its shares had hit an all-time low of ₹441.1.

The company has since Thursday tried to placate investor concerns over the impact of RBI’s restrictions. On 1 February, One97 Communications told the stock exchanges it expects RBI’s action to have a worst-case impact of ₹300-500 crore on its annual Ebitda (Earnings Before Interest, Taxes, Depreciation, and Amortization) going forward.

“However, the company expects to continue on its trajectory to improve its profitability,” it said. Additionally, Paytm founder and chief executive Vijay Shekhar Sharma told analysts and investors on Thursday that the restrictions were a ‘speed bump’.

On a blogpost, the company cited a post by Sharma on X, “To every Paytmer, Your favourite app is working, will keep working beyond 29 February as usual.”