Update: Paypal has resumed electronic tranfers to Indian bank accounts. In an announcement, the company says it will continue to offer the refund of $5 for cheque withdrawals. However, it’s important to note that “Please be reminded that any payments received into your PayPal account from the export of goods and services cannot be re-used for making purchases or any other payments.”

According to a previous notification from Paypal, withdrawal to an Indian bank account was allowed if a purpose code is used, indicating that it’s payment received for export of goods and services. So you can withdraw money if it’s export income, but you can’t spend it while held in a Paypal account? This suggests that issues still remain when it comes to full compliance with Indian regulations; I don’t think we’ve heard the last of this yet.

Update (July 29th 2010): We requested Paypal for an interview, seeking to understand better which RBI guidelines they need to comply with, and why even non-P2P electronic transfers were stopped after an apparent resolution on March 2nd. Has there been any significant change in policy? Which licenses are needed and what will Paypal have to do to comply with Indian regulations?

Paypal has responded (no interview yet, though) saying that they received regulatory instructions to stop electronic withdrawals from August 1st. Their response, in full:

“Currently, all we can confirm is that we have received regulatory instructions to stop electronic withdrawals on August 1st. Our India users need to submit a request for electronic withdrawals before July 29 in order to be processed by August 1. The only change happening right now is that electronic withdrawals can be used today, but will not be available from July 29th onwards until further notice.”

Earlier (July 28th): Online wallet company PayPal, which ran into regulatory trouble with the Reserve Bank of India (RBI), has said that it is stopping electronic transfers to the country, until further notice. In an email sent out to account holders from India (a copy of it below), Paypal says that from July 29th onwards, users will only be able to request for withdrawal by cheques. What is good on PayPal’s part is that it says it will refund the $5 (Rs. 230) fee usually charged for cheque withdrawals, for its users in India; it would have had to, in order to prevent an exodus from the site, because with electronic transfers, at worst, transfers below Rs. 7000 were charged Rs. 50. The RBI is concerned that PayPal operates as an unregistered money transfer company in India.

If you’ve begun using an alternative to Paypal, let us know in the comments.

While the uncertainty around PayPal isn’t good for users, and would have small merchants and individual developers scrambling for alternatives (we’ve listed some here), one thing still works in PayPal’s favor: it still remains a trusted mode of collecting payments. But it does need to resolve this issue quickly before patience wears out.

More when we have updates

The PayPal vs RBI Timeline:
Feb 5th – 14th: PayPal Disallows P2P Payments, Transfers To Local Banks
Feb 27th: PayPal To Resume India Payments By 3rd March; Export Code Needed
March 2nd: PayPal Payments In India Will Require ‘Purpose Code’; Still No P2P
March 18th: PayPal Needs To Comply With RBI Regulations By April 30th, 2010

Email from PayPal

Dear Nikhil Pahwa,

In accordance with regulatory instructions, we would like to notify you about a change in our withdrawal functionality in India starting on August 1, 2010. At present you can request for either an electronic or cheque withdrawal of funds from your PayPal account if you are an India user.

From July 29, 2010 onwards, you will only be able to request for a cheque withdrawal of funds from your PayPal account.

While we are working hard to restore the electronic withdrawal service, in the meantime, we are bringing this matter to your attention so that you can plan your future withdrawal activities accordingly.

To request for a cheque withdrawal:

  1. Log into your PayPal account, click on ‘Withdraw’.
  2. Click on the ‘Request a cheque from PayPal’ link.
  3. Enter the withdrawal amount and select your mailing address, then click‘Continue’.
  4. Click ‘Submit’ to confirm your request.

In order to help you with this change and until further notice, we will refund the $5 USD cheque withdrawal fee to you for cheque withdrawals made on July 29, 2010 onwards.

For any questions, please log into your PayPal account and click ‘Contact Us’ at the bottom of the page.

We apologise for any inconvenience caused from this change in our withdrawal functionality. We will provide ongoing updates to you here. We thank you for your attention and patience as we work tirelessly to resolve this situation as quickly as possible.
Thank you,

The PayPal Asia Team