Paytm’s Regulatory Crisis: What Went Wrong and What Lies Ahead
Feb 13, 2024
Paytm, India’s largest digital payments platform, is facing a major challenge from the Reserve Bank of India (RBI). The RBI has imposed severe restrictions on Paytm’s banking arm, Paytm Payments Bank, and is considering canceling its license after finding multiple violations of the rules and regulations governing payments banks.
This article will explore the reasons behind the RBI’s action, the impact on Paytm’s customers and investors, and the future prospects of Paytm in the highly competitive and rapidly evolving digital payments market in India.
Paytm, which stands for “Pay Through Mobile”, is a digital wallet and e-commerce company founded by Vijay Shekhar Sharma in 2010. Paytm allows users to make online and offline payments using their mobile phones, QR codes, and biometric authentication. Paytm also offers a range of services such as bill payments, recharges, ticket bookings, online shopping, insurance, mutual funds, and lending.
Paytm Payments Bank is a subsidiary of Paytm that operates as a restricted bank that can take deposits up to Rs 1 lakh per customer, but cannot lend money or issue credit cards. Paytm Payments Bank was launched in 2017 as one of the first payments banks in India, a new category of banks created by the RBI to promote financial inclusion and digital payments in the country. Payment banks are also required to maintain a minimum capital adequacy ratio and invest at least 75% of their deposits in government securities. Paytm Payments Bank claims to have over 60 million customers and 5 million merchants on its platform.
The RBI has been closely monitoring the activities of Paytm Payments Bank since its inception and has found that Paytm Payments Bank failed to comply with these requirements on multiple counts.
Let’s delve into the Sequence of events related to Paytm:
Warren Buffett’s Stake Sale (November 2023):
On November 25, 2023, Warren Buffett’s firm, Berkshire Hathaway, made a significant move by selling its entire 2.46% stake in Paytm’s parent company, One97 Communications. This decision resulted in a loss of over ₹620 crore for Berkshire Hathaway.
The shares were sold through an open market transaction on the National Stock Exchange (NSE). Previously, Berkshire Hathaway had acquired this stake at an aggregate value of ₹2,179 crore, but the recent sale occurred at an average price of ₹877.29 per share.
This development has drawn attention to Paytm’s evolving financial landscape and the challenges it faces in the market. Additionally, the company’s stock performance today has been adversely impacted, with a decline of over 15% . The reason is a downgrade by JP Morgan reduced price target from Rs. 1200 to Rs. 900. Goldman Sachs reduced target price from Rs.1,250 to Rs. 840.
2. RBI’s Decision (December 2023):
On December 7, 2023, the Reserve Bank of India (RBI) took action against Paytm due to the recent decision to increase the risk weights on unsecured lending from 100% to 125%. On account of the recent RBIs decision to increase the risk weights on unsecured lending from 100% to 125%. Paytm has decided to reduce its exposure to less than rs. 50,000 digital loans disbursed through its platforms.
This segment was 70% to 73% of all postpaid loans (Buy now pay later) disbursed, 3% to 5% of all personal loans and 4% to 6% of total merchant loans disbursed in November 2023. In Q3 FY24 the company launched high ticket loans ranging between rs. 3 lakh to 7 lakhs.
3. Tussle with RBI Started
According to the RBI, Paytm Payments Bank violated several norms and regulations, such as:
- Failing to conduct proper KYC verification of its customers, exposing them to fraud and money laundering risks.
- Maintaining nodal accounts of its parent company One97 Communications and its subsidiary Paytm Payment Services, which are not permitted for payments banks.
- Offering services like FASTag and NCMC cards, which are beyond the scope of payments banks.
- The RBI had earlier directed Paytm Payments Bank to stop onboarding new customers in March 2022, but the company did not rectify its issues and continued to flout the rules.
RBI's Action and Consequences
On January 31, 2024, the RBI barred Paytm Payments Bank from accepting new deposits, issuing prepaid instruments, and providing fund transfer services, citing non-compliance with rules and supervisory concerns.
The RBI action has raised questions about the future of Paytm and its customers, as well as the regulatory environment for the fintech sector in India.
The RBI took the action against Paytm Payments Bank under Section 35A of the Banking Regulation Act, 1949, which empowers the central bank to issue directions to banks in the interest of public safety and banking policy.
The RBI said that it found persistent non-compliances and material supervisory concerns in Paytm Payments Bank, warranting further action.
The RBI also wanted to send a strong message to other payments banks and fintech players that they have to follow the rules and regulations, and ensure good governance, risk management, compliance culture, and customer protection.
Consequences of the RBI action
The RBI action has put Paytm Payments Bank's operations in jeopardy, as it cannot accept new deposits or offer core services like wallets and fund transfers after February 29, 2024. The existing customers of Paytm Payments Bank can withdraw or use their balances without any restrictions, but they cannot add more money to their accounts or wallets.
The RBI also hinted that it may cancel the bank's license after the deadline, unless Paytm Payments Bank can demonstrate compliance and address the regulator's concerns. The RBI's ban on Paytm Payments Bank has far-reaching consequences for the fintech sector and the digital economy in India. Paytm Payments Bank was one of the largest and most popular payments banks in the country, with over 60 million customers and a market share of 40%.
Moreover, the RBI's action will also impact the parent company, One97 Communications Ltd, which owns 51% of Paytm Payments Bank and operates the Paytm app, India's largest digital payment platform.
Impact on Customers and Regulators
These violations not only exposed Paytm Payments Bank to financial and operational risks, but also eroded the trust and confidence of its customers and regulators. The RBI’s order came as a shock to many Paytm users, who were left wondering about the safety and security of their money and data. Some users also faced difficulties in accessing their accounts or transferring their funds to other platforms.
Paytm's customers will have to look for alternative options to manage their money and make payments. Some of the competitors of Paytm, such as PhonePe, Google Pay, and Amazon Pay, may benefit from this situation and attract Paytm's customers to their platforms by capitalizing their market share.
The RBI action has also affected the share price of Paytm, which fell by 10% on February 1, 2024, wiping out Rs 16,000 crore of its market value.
Paytm Shares in the Limelight as RBI Stands Firm on Regulatory Action
The RBI governor Shaktikanta Das has reiterated that the central bank would not reconsider the regulatory action taken against Paytm Payments bank. This comes after a report claimed that Paytm was nearing approval for investment in its payments gateway arm. Paytm informed the stock exchanges that it had sought the government’s approval for the investment by the company in Paytm Payments services ltd.(PPSL), but it was still pending.
Paytm’s stock will also be in the spotlight after the CEO of Axis Bank, Amitabh Chaudhry, said his bank was willing to collaborate with Paytm if the RBI permits it.
Paytm is trying to overcome these challenges and improve its situation. Paytm is in talks to buy another company called Bitsila, an ONDC platform.
Paytm Share price details:
Paytm’s shares have dropped by 45 per cent since then, and have finished lower in five out of the eight sessions. The stock rose 0.65 per cent to Rs 422.60 on Monday.
Current Price: Rs. 422.20
Market Cap: Rs. 266.67 billion
52-Week High: Rs. 998.30
52-Week Low: Rs. 395.00
Conclusion
The RBI action against Paytm Payments Bank is a major setback for the fintech giant, which has been facing regulatory hurdles and competitive pressures in the Indian market. The action also highlights the need for a clear and consistent regulatory framework for the fintech sector, which can balance innovation and consumer protection, and foster a level playing field for all players. The action also poses a challenge for Paytm and its customers, who have to find alternative solutions for their financial needs, and cope with the uncertainty and disruption caused by the RBI action.