Introduction
The Reserve Bank of India (RBI) has directed Paytm Payments Bank, one of the leading payments banks in India, to stop onboarding new customers and to halt the opening of new accounts. This regulatory action by the RBI will have significant implications for Paytm and its operations.
RBI’s Directions
On January 31, 2023, the RBI ordered Paytm Payments Bank to stop accepting any fresh deposits. This directive will come into effect from March 1, 2023.
As per the RBI’s directions:
- Paytm Payments Bank will be barred from opening any new accounts for customers after February 28, 2023.
- No top-ups or deposits will be allowed into existing accounts after this date.
- The bank has been directed to stop all debit and credit transactions, including wallet transactions, after February 28.
The RBI cited Section 35A of the Banking Regulation Act, 1949 as the regulatory provision for imposing these restrictions in the interest of depositors.
Impact on Paytm
Paytm has stated that it will comply with the RBI’s directions. However, it estimates that the restrictions could have a ₹300-500 crores impact on its annual EBITDA.
Following the RBI’s order, One97 Communications Limited, the parent company of Paytm, has announced that it will dissociate itself from Paytm Payments Bank. It will instead look to partner with other banking institutions.
Background of Regulatory Actions
This is not the first time the RBI has imposed restrictions on Paytm Payments Bank:
- In March 2022, the RBI had directed the bank to stop onboarding new customers.
- The current directives are based on concerns arising out of a system audit and compliance validation process conducted by the RBI.
Operational Impact
Under the new directives, Paytm Payments Bank will not be able to add any new customers to its platform.
Existing bank account holders will face the following limitations:
- They cannot top up their wallets or bank accounts after February 28, 2023.
- All debit and credit transactions will be barred after this date. This includes transfers using wallets, cards, and UPI.
However, customers will be allowed to withdraw or utilize their existing account balances as per their convenience.
Moving Nodal Accounts
As part of complying with the RBI’s directions, Paytm will have to move the nodal accounts of One97 Communications Limited (OCL) and Paytm Payments Services Limited (PPSL) from Paytm Payments Bank to other banks by February 28, 2023.
Concerns Highlighted by RBI
The RBI seems to have concerns regarding the close links between Paytm, OCL, and the payments bank.
Its directives emphasize the need for “arms-length distance” between the promoter entity and the payments bank. This is critical for sound corporate governance.
Over the medium term, the restrictions could hamper some of Paytm’s innovative offerings involving linkages between its platform and the bank.
Conclusion
The RBI’s restrictions on Paytm Payments Bank are a major setback for the company. While existing customers will be protected, the inability to onboard new users or accept fresh deposits will impact its growth plans and profitability.
Paytm will need to address the central bank’s concerns regarding compliance and governance for a potential relaxation of the restrictions in the future.