The Reserve bank of India directed the Paytm payments bank to stop onboarding new customers, stop deposits or credit transfers or provide any form of personal or business banking services after February 29, 2024. From Reserve Bank of India – Press Releases (rbi.org.in):
the Reserve Bank of India, in exercise of its powers under section 35A of the Banking Regulation Act, 1949, had directed Paytm Payments Bank Ltd (PPBL or the bank) to stop onboarding of new customers with immediate effect.
2. The Comprehensive System Audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action.
3. Accordingly, in exercise of its powers under section 35A of Banking Regulation Act, 1949 and all other powers enabling it in that behalf, the Reserve Bank of India, has today directed PPBL as below:
- No further deposits or credit transactions or top ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, NCMC cards, etc. after February 29, 2024, other than any interest, cashbacks, or refunds which may be credited anytime.
- Withdrawal or utilisation of balances by its customers from their accounts including savings bank accounts, current accounts, prepaid instruments, FASTags, National Common Mobility Cards, etc. are to be permitted without any restrictions, upto their available balance.
- No other banking services, other than those referred in (ii) above, like fund transfers (irrespective of name and nature of services like AEPS, IMPS, etc.), BBPOU and UPI facility should be provided by the bank after February 29, 2024.
- The Nodal Accounts of One97 Communications Ltd and Paytm Payments Services Ltd. are to be terminated at the earliest, in any case not later than February 29, 2024.
- Settlement of all pipeline transactions and nodal accounts (in respect of all transactions initiated on or before February 29, 2024) shall be completed by March 15, 2024 and no further transactions shall be permitted thereafter.
Reading through this press release at first, it may look like a drastic and immediate action on one of the stars of fintech startup ecosystem, however, this was far from immediate or sudden. Paytm did receive 2 additional warnings and time from RBI:
- In Mar 11, 2022: Paytm was directed to stop onboarding new customers until a comprehensive IT systems audit was conducted.
- In October 12, 2023: Paytm was fined a penalty of INR 5.93 Crores for lapses in compliance for customer KYC.
Clearly, Paytm payments bank received at least 2 prior warnings to fix the gaps and address concerns raised by the RBI. Paytm payments bank was operating as a banking institution since May 2017, however, the added regulatory and compliance rigor came after the payments bank was added to the second schedule of the reserve bank of India Act, 1934 in Oct 2021. Inclusion to the second schedule provides a lot of benefits such as access to capital from RBI, membership to the clearing houses etc. (which meant that the bank could expand its financial offerings), however, it also brings compliance requirements from the RBI. This addition also came at an opportune time as the fintech startup was planning an IPO in November 2021.
So, what was the impact of this change? Here is the growth rate for the startup that I was able to capture from their financial statements:
Clearly, 2018 to 2021 was not looking great for the fintech star and things really picked up in 2022 and 2023, demonstrating a growth rate of about 40% and 78% respectively. There seems to be a direct correlation between the growth rate that the company observes in 2022 and 2023 with the inclusion into the second schedule and the compliance concerns raised by the RBI. We would have to wait for the specifics of the concerns raised by RBI, however, it seems logical that the company prioritized growth and may have missed meeting some strict compliance requirements levied by the RBI. All said, it sure is surprising and great to see that the startup mentality of prioritizing fast growth is still live and thriving inside the public Paytm!
techiesbridge 