Why did RBI penalize the Paytm Payments Bank Ltd? How is it going to affect the services of the fintech company? Is it related to money laundering? Read here to learn all about the debacle.
The Reserve Bank of India (RBI) dealt a serious blow to Paytm, a fintech services provider, by prohibiting its payments bank subsidiary, Paytm Payments Bank Ltd (PPBL), from accepting new deposits and top-ups into its wallets or accounts as of February 29.
Back in March 2022, PPBL was prohibited from onboarding new new clients. Following the discovery of “persistent non-compliance and continued material supervisory concerns in the bank” in an audit report, the most recent action was taken.
Paytm payments bank
Paytm Payments Bank Ltd (PPBL) was launched in 2017, following the approval by the Reserve Bank of India (RBI) to convert certain existing wallet providers into payment banks.
This new category of bank was introduced by the RBI as part of a broader strategy to enhance financial inclusion by offering limited banking services, focusing on savings and payment services rather than credit.
Features and Services
- Savings and Current Accounts: Paytm Payments Bank offers savings and current accounts with a nominal interest rate. The bank has made opening an account simple and straightforward, requiring only a verified mobile number and KYC (Know Your Customer) details.
- Digital Transactions: Reflecting its digital-first approach, the bank promotes cashless transactions, providing services like online transfers (IMPS, NEFT, RTGS), debit cards, and mobile banking.
- Debit Cards: In partnership with financial services corporations, Paytm Payments Bank issues debit cards that can be used across a vast network of ATMs and retail outlets in India and abroad.
- Paytm Wallet Integration: The bank is seamlessly integrated with the Paytm Wallet, offering users an easy option to transfer funds between their wallet and bank account.
- Financial Inclusion: By offering a minimum balance requirement of zero and a digital-first approach, Paytm Payments Bank targets to bring banking services to the rural and semi-urban population, thus promoting financial inclusion.
Objectives of payments bank
- Promote Financial Inclusion: A primary objective is to provide basic banking services to millions of unbanked Indians, leveraging technology to reach remote areas.
- Encourage Cashless Transactions: By providing easy-to-use digital transaction options, the bank aims to reduce dependency on cash and promote digital payments.
- Boost the Digital Economy: By integrating banking with digital wallets and online payment systems, Paytm Payments Bank plays a crucial role in supporting India’s digital economy.
What is the RBI’s action against Paytm Payments Bank?
The RBI has prohibited the Paytm subsidiary from taking any more deposits, top-ups, or credit transactions into its wallet or accounts.
- This also holds for its prepaid cards for National Common Mobility Cards (NCMC) and FASTags.
- Nonetheless, current clients may utilize their remaining balances to access the services.
- Macquire Capital claims that the payments bank is home to the more than 330 million wallet accounts of One97 Communication (OCL), the parent firm.
- In other words, transactional funds are stored within the payment bank’s wallets.
- PPBL has been prohibited from carrying out banking services (like services like AEPS, IMPS, etc), bill payments, and UPI.
- PPBL reportedly had numerous non-compliant accounts lacking proper KYC verification, with thousands of instances where a single PAN was used to open multiple accounts.
- Additionally, transactions exceeding regulatory limits in minimum KYC prepaid instruments raised red flags about potential money laundering activities.
- One97 Communications holds 49% of the paid-up share capital (directly and through its subsidiary) of PPBL. Paytm Founder and CEO Vijay Shekhar Sharma has a 51% stake in the bank.
- RBI has advised customers and merchants of PPBL to shift their accounts to other banks by March 15, to the embattled company to close most of its operations, including deposit and credit transactions.
It has also been directed to terminate at the earliest, or before February 29, nodal accounts of its parent company and Paytm Payments Services.
- Nodal accounts are a type of bank account opened by businesses (financial intermediaries). They are used for holding money from participating banks from the consumer’s side, and ultimately remitting to the specific merchant.
Lastly, RBI has asked the subsidiary to settle all pipeline and nodal accounts transactions by March 29.
RBI has clarified that Paytm QR code, Paytm Soundbox, or Paytm POS terminal will continue to work after March 15, if it is linked to other banks instead of PPBL.
How has Paytm responded?
The business said that it would no longer be collaborating with PPBL and would instead be dealing with other banks.
Additionally, it plans to increase the number of third-party bank relationships it has with other banks for merchant acquisition services (which include supplying the necessary infrastructure to acquire merchants and facilitate their access to payments).
The migration is to unfold in three stages:
- The first step would be locating a bank partner interested in integrating with the required Paytm ecosystem.
- Second, determining the subsequent commercial feasibility; and
- Third, enabling the account-to-account migration may take some time since the time is short.
A one-time migration would be the alternative.
Challenges and concerns
According to RBI norms, companies are prohibited from engaging in lending operations when it comes to licensing payment banks.
PPBL doesn’t make direct loans. Rather, it offers credit-dispensing goods from other companies.
The other concern is with its party transactions and governance framework.
Conclusion
The future of Paytm Payments Bank lies in its ability to innovate, expand its services, comply with regulatory demands, and continue promoting financial inclusion and digital payments.
As technology and consumer behaviors evolve, the bank’s adaptability will be crucial to its ongoing success and contribution to the broader financial ecosystem in India.
Related articles: Fintech in India
-Article by Swathi Satish
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