India’s central bank has ordered Paytm Payments Bank, the banking arm of digital payments firm Paytm, to stop onboarding new customers and directed the bank to appoint an IT audit firm to conduct a comprehensive audit of its IT system. This major clampdown by the Reserve Bank of India (RBI) comes after the regulator found several lapses at the bank over the last few years.
RBI Finds Multiple Lapses At Paytm Payments Bank
According to sources close to the development, the central bank found that Paytm Payments Bank failed to comply with its directions on multiple counts over the years. The bank continued to onboard customers even after RBI communication regarding its observations. The regulator also does not seem convinced with Paytm Payments Bank’s workaround solutions. Additionally, RBI has concerns around the unbridled access that China’s Alibaba and its affiliate firms have to user data.
RBI started taking an action against the bank after its inspection last year, which revealed multiple violations that the bank has not been able to resolve for the last three years. It seems RBI’s patience has run out and the bank has left it with no choice but to take stringent action to protect consumers’ interest.
Alibaba and its associate firms own around 45% stake in Paytm, which gives them indirect access to all user data handled by Paytm Payments Bank. While the bank claims to have a strong firewall to prevent access to user data by third parties, RBI does not seem fully convinced. The regulator probably wants the bank to further tighten its IT systems.
Impact On Customers And Vijay Shekhar Sharma
Paytm Payments Bank is prohibited from onboarding new customers with immediate effect but the existing users are not impacted, as per the current RBI directive. Customers can continue to transact using their wallets and cards. However, if RBI intensifies the action further in the future, it risks impacting Paytm’s 64 million strong user base.
|No onboarding of new customers| Potential growth impacted but existing customers unaffected
|Stoppage of further credit| Inconvenience to customers but can still transact using wallet balance
| Complete ban| Major impact with customers unable to access any services
RBI’s action is undoubtedly a huge setback for Paytm founder Vijay Shekhar Sharma, who has big ambitions with Paytm Financial Services arm. Curtailing the bank’s business hampers the growth prospects of his financial services dream. It remains to be seen if Sharma will be able to convince the regulator about complete compliance.
Meanwhile, the drastic RBI action resulted in Paytm shares crashing by over 20% yesterday, wiping out Rs 7,300 crore of investor wealth. The heavy drubbing shows that the market has turned extremely wary of any regulatory uncertainties surrounding the stock.
RBI Could Revoke Paytm Bank’s License
According to some reports, RBI may even consider revoking Paytm Payment Bank’s license after reviewing the IT audit report. The bank has already stopped opening new savings and current accounts and directed the bank to appoint an IT audit firm to conduct a comprehensive system audit.
Revoking the bank’s license will have disastrous implications for Paytm and virtually sounds the death knell for Sharma’s financial services ambitions. It can also severely impact millions of customers.
However, the bank has reiterated its commitment to abide by RBI’s direction and address their concerns quickly. The bank’s management stated, “PPBL remains committed to working with the regulator to address their concerns as quickly as possible.”
It needs to be seen if Paytm can overturn RBI’s lack of conviction around the stability of its IT systems and assuage the regulator’s concerns. The IT audit report expected in the next two months will decide the bank’s fate to a large extent.
Political Backlash Over RBI Action
The strict regulatory action against digital payments major Paytm has also invited political backlash. Senior Congress leader Jairam Ramesh has slammed the Modi government over RBI’s decision and raised concerns around Chinese influence via Paytm shareholding.
In a tweet attacking PM Modi, Jairam Ramesh said, “RBI stops Paytm Payments Bank from enrolling new customers and ordered a comprehensive audit of its IT systems. China’s Alibaba & its associates own 40% of Paytm. Is Modi Sarkar compromising India’s national security by allowing large Chinese ownership of our digital payments networks?”
The Congress leader has clearly attempted to stoke nationalism sentiment by alleging that the Modi government is allowing Chinese influence in the country’s digital payments infrastructure, risking data privacy and national security. However, the RBI action seems primarily aimed at safeguarding consumers’ interest by ensuring IT systems stability at banks rather than targeting specific shareholdings.
What Next For Paytm Payments Bank
While the bank claims it will work closely with the regulator to fix the gaps quickly, analysts expect that it won’t be easy for Paytm to regain RBI’s confidence. The regulator rarely reverses its decisions easily once violations have reached a tipping point forcing stern action.
As part of the RBI directives, Paytm Payments Bank cannot open new accounts for the next few months until further notice. This severely impacts its ability to onboard new users or merchants.
The bank will also have to submit IT audit reports to RBI, based on which the regulator will review further action after 60-90 days. If RBI decides the gaps cannot be plugged, it even holds the option to revoke the banking license as a final resort.
Paytm desperately needs the RBI ban to be temporary blip if its dream run in financial services has to get back on track. However, the severity of RBI’s action makes it an extremely challenging task for the company. Vijay Shekhar Sharma has his task cut out to regain the regulator’s confidence and stabilize the recent crisis situation.
The coming months will be crucial to assess if one of India’s fintech pioneers Paytm can overcome regulatory hurdles and bounce back strongly. Its survival depends on convincing RBI about compliance and systems stability. Any adverse move can permanently dent investor confidence and even raise existential questions for the company.
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