The Reserve Bank of India (RBI) has ordered a ban on Paytm Payments Bank from taking on new customers and directed the bank to appoint an IT audit firm to conduct a comprehensive system audit. This move comes after the RBI found several lapses at the bank, including violations of money laundering norms.
RBI Finds Improper KYC and Money Laundering Concerns
The RBI conducted an inspection between March and September 2022 and found that Paytm Payments Bank opened a number of accounts without proper Know Your Customer (KYC) norms and due diligence.
According to sources, thousands of accounts lacked documentation and several had common mobile numbers or addresses. The central bank suspects these could be used for money laundering activities.
Under anti-money laundering rules, banks are required to verify the identity of account holders and keep records of financial transactions. Flouting these rules can attract heavy penalties from the RBI.
Immediate Ban on New Customers
On Friday, the RBI directed Paytm Payments Bank to stop opening new accounts amid the ongoing investigation over KYC breaches.
The bank has also been prohibited from activating dormant wallets and payments through credit cards. However, existing customers with KYC-compliant accounts can continue using all banking services without any disruption.
Paytm said it is taking immediate steps to comply with RBI directions. It has stopped onboarding new customers and appointed Deloitte to conduct the special audit ordered by the RBI.
Share Price Crashes Over 30%
The regulatory clampdown sparked a massive sell-off of Paytm’s parent One97 Communications’ shares over the last two days. The stock crashed over 30%, wiping out nearly $2 billion from its market value.
Several brokerages have downgraded the stock and cut target prices after the latest RBI order. Analysts fear this could have ripple effects across Paytm’s various businesses.
“The RBI action will likely have a material impact especially on Paytm’s brand and ability to onboard new merchants,” JP Morgan said in a note.
| Day | Opening Price | Closing Price | Change |
|---|---|---|---|
| Friday | Rs 575 | Rs 539 | -6% |
| Monday | Rs 511 | Rs 404 | -21% |
History of Compliance Issues
This is not the first time Paytm Payments Bank has faced action over lapses and violations.
In 2018, the bank was prohibited from onboarding new customers for over four months after the RBI found issues with the bank’s IT systems.
Last year, Paytm had to pay over Rs 1 crore as penalty for violations in Know Your Customer (KYC) norms.
As per an RTI response, Paytm Payments Bank has been fined a total of Rs 6 crore by the RBI since its inception in 2017 for various violations.
What Next for Customers
Even though existing users can continue transacting, the Confederation of All India Traders (CAIT) has appealed to merchants and customers to stop using Paytm’s payment instruments. CAIT cited frequent regulatory actions as the reason behind their advisory.
For wallet users, the balances can be transferred to their bank accounts if they wish to discontinue.
Customers of Paytm Payments Bank need not worry as the central bank has assured that the bank is well capitalized. They can continue using their accounts and funds are completely safe.
Business Impact
Analysts estimate that around 5-10 million customers could have onboarded onto Paytm’s platform over the next one year. This lucrative business will now go to rivals like PhonePe, Google Pay, Amazon Pay and others.
In the December 2022 quarter, payment volumes at Paytm had crossed the $100 billion mark for the first time ever. This growth momentum could take a hit at least in the short-term.
Merchants and offline retailers are also likely switch allegiances given the negative publicity. Players like SBI Merchant Services stand to gain.
The share price crash has wiped out over $20 billion from Paytm’s peak market value. Rebuilding stakeholder confidence will be an uphill battle for the company after this jolt.
Why RBI’s Crackdown Matters
The RBI action reinforces that regardless of size or political clout, no player gets special treatment when it comes to regulatory compliance and customer safety.
Paytm has been the poster boy for India’s fintech revolution with over 350 million users. But regulators have come down hard given the platform’s scale and need to set example.
For the RBI, protecting consumers from potential frauds overrides short-term growth concerns linked to payments innovation. Safety of the financial system remains paramount.
The ongoing investigation into money laundering risks also underscores how technology can be misused by black money hoarders. The implications are far reaching beyond just Paytm Payments Bank.
Going forward, more scrutiny and tighter controls over fintech platforms seem inevitable despite the disruption it may cause.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
