Update (February 14,2009): The company has said in its blog that they are still trying to resolve the issue with the RBI. For the time being, sellers can request a cheque which is available from the Withdraw Money tab of the users account. PayPal charges $5 as cheque withdrawal fee but the company will refund the money within a week due to the prevailing circumstances. It usually takes 5-7 working days for a seller to receive the cheque.

Update (Feb 10, 2009): In an update on the PayPal blog, the company has said that it could take a few months to resolve the issue, and answer questions posed by India’s regulators – probably the Reserve Bank of India. The bone of contention is whether money transfers between individuals can be deemed as money remittances or not. However, “Customers should be able to withdraw their funds to a local bank within the next few days. In the meantime, we’re going to restore the money into the PayPal accounts of any customers in India who have initiated a recent withdrawal, so they know that the money is safe in their accounts. Customers will also be reimbursed for any withdrawal fee charges.”

Nikhil adds: In my opinion, at the core of this issue is whether the RBI perceives Paypal as an online wallet, which it is. The guidelines are specific for India – open loop systems such as wallets, which allow withdrawal of money once loaded, are restricted to banks. Using it for payments to companies are fine, but transfers between individuals are not. This is intended to prevent transactions that don’t follow the Know Your Customer norms. Unless the RBI changes its policy to allow wallets, it’s unlikely that Paypal will be allowed to offer P2P payments in India.

If Wallet365 is not allowed to offer P2P payments in India, why should PayPal? Read about Wallet365 here.

Earlier Post (Feb 9, 2009): The eBay owned online payment service PayPal has abruptly stopped person to person (P2P) payments (transfer of money to a family or friend or for donations) and withdrawal from Indian banks for users attempting to send money from and to India, TechCrunch reported. The website’s international send money portal no longer offers the Indian Rupee (INR) in the drop down list of currencies and India has been removed from the list of countries allowing users to send money using the Personal Payment option. (Screenshot below)

PayPal has clarified that it has not halted e-commerce transactions and Indian merchants can continue to charge their clients and receive payments for goods shipped to an address: but they will be unable to withdraw the funds from local banks.

The company has earned the wrath of customers by not offering a prior intimation nor a time-line for when the service will be back on track. More grist to the mill for sites such as PayPalSucks.com!

Service, Compliance Issues

PayPal communications team member and spokesperson Anuj Nayar offers a weak explanation for the termination of personal payment services in India in the official company blog: “Personal payments to and from India and transfers to local banks in India have been suspended while we work with our business partners and other stakeholders to address questions they have about the service.”

INR deleted from drop down list

Slashdot has a comment from a reader that notes the cause could be a policy compliance issue: RBI may have demanded some documents on offshore money transfers that Paypal was unable to furnish. Recently, the Reserve Bank of India framed new directions for all banks and some e-commerce and m-commerce providers which will come into effect in March. Also read: RBI’s Vision For Mobile & E-payments, Major Projects.

The Official Mail

The notification e-mail PayPal users receive says:

Hello user,

Your payment of xxx amount has been sent back to the sender of the payment.

We reversed this payment because we have stopped allowing personal payments to be sent to or from India.

If this was a payment for a purchase of goods or services, and not a personal payment, then you may contact the buyer and have him or her resend the payment as follows: (a) click the Send Money tab, (b) select “Goods,” and (c) provide a shipping address.

If this payment was a personal payment such as a gift, then we have requested that the sender find another payment method until we restore personal payments to and from India.

We are trying to resolve this issue as quickly as possible and we’re sorry for any inconvenience.

Thank you,
PayPal

Alternate Services

Already, users are considering alternative services: a user at a forum discussing this topic quotes a few:
Alertpay
Libertyreserve
Moneybookers
Strictpay
Perfectmoney

Others are: Remit2India by Times Money, ICICI Bank’s Money2India. More on our list of digital payment companies in India.

Related

RBI Allows Cash Withdrawal Via Mobile; Increases Transaction Limit

RBI Allows PCOs, Grocery Shops To Offer Banking Services, But Not Telcos