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Petition alleges Paytm Payments Bank’s “postpaid” lending service violates RBI operating guidelines

The Delhi High Court has sought responses from the Reserve Bank of India (RBI) and Paytm to a public interest litigation suit that questions the legality of Paytm Payments Bank’s postpaid service, the Economic Times reports. The petition, filed by economist Abhijit Mishra, claims the service violates RBI regulations on the scope of operations of payments banks as it includes credit and lending services. Section 1.6 of RBI’s operating guidelines for payments banks forbid them from performing non-banking financial activities and from lending money to anyone.

From the RBI’s operating guidelines for payments banks:

1.6 Restrictions on loans and advances (including lending to NBFCs) including regulatory limits
PBs will not be permitted to lend to any person including their directors. However, PBs may lend to their own employees out of the bank’s own funds, as per a Board approved policy outlining the caps on such loans.

Secondly, the petition claims that Paytm has not notified the RBI of its lending operations, which violates the central bank’s code of conduct for payments banks. It also says that Paytm Payments Bank’s postpaid facilities are handled by Clix Finance India Pvt, a non-banking financial company (NBFC) based in Delhi. Mishra’s petition states Paytm has not publicly disclosed that it allows a third-party firm to handle the private financial data of its consumers, and has thus violated the constitutional right to privacy, the report says.

Paytm’s postpaid service is under the scanner as the company has its own payments bank. One of seven payments banks licensed by the RBI, it is governed by a different set of laws to other lenders such as LazyPay and Simpl. However, Paytm also has a digital wallet, and it is not yet clear if the postpaid service falls under the company’s wallet division or payments bank. Though the company could claim it falls under the wallet division in its reply, it would still need to tell the court why it outsourced its financial operations to Clix Finance.

Operating guidelines for payments banks

The RBI issued operating guidelines for payments banks in October 2016. Here is a lowdown:

1. Physical access points

– The RBI will have to approve payments banks’ annual plans for opening physical access points for five years. It may remove prior approval after five years after a review.
– For addressing customer grievances and agent support supervision, a payments bank is required to have a bank employee at a fixed location at the district level.

2. Regulation of business correspondents (BCs)

– Inter-operability of BCs will be allowed except for opening of savings and current accounts. In cases where a payments bank is acting as a BC for a commercial bank, the BCs from the payments bank cannot open deposit accounts for the partner bank or undertake KYC documentation for that bank.
– BCs cannot undertake any offline transactions and need to be connected to the Internet.
– Payments banks are exempted from having a base branch for a certain number of BCs or access points managed by BCs as as applicable to scheduled commercial banks.

3. KYC requirements

– Payments banks can rely only on electronic authentication or confirmation of terms and conditions for opening an account. A wet signature is not mandatory.
– In case of KYC done by a telecom company, which is a promoter of the payments bank and has the same quality as prescribed for a banking company, they may obtain the KYC details of the customer from that telecom company, subject to customer consent.

4. Bank deposits

– Payments banks are only permitted to open savings and current deposit accounts. The accounts will be limited to Rs 1,00,000. However, payments banks can make arrangements with other commercial banks if it crosses the limit, to be swept into an account opened for the customer at that bank. This arrangement should be activated with the prior written consent of the customer.
– Payments banks don’t need to issue passbooks and may provide statement of account in paper form on request on chargeable basis. They may provide account information through other modes such as SMS and internet banking.
– Payments banks have to provide electronic confirmation through SMS/e-mail/printed proof for each account transaction.

5. Investments norms

– Payments banks will invest 75% of demand deposits in government securities or treasury bills with maturity of one year for maintaining Statutory Liquidity Ratio. While the rest 25% of the deposits will be maintained as demand and timed deposits with other commercial banks.
– Payments banks will be permitted to invest in bank certificate of deposits (CDs) within the limit applicable to bank deposits.
– The investments made out of their own funds shall not be in assets or investments where the promoter is a direct or indirect obliger. These banks will not be allowed to classify any investment, other than those made out of their own funds, as held-to-market (HTM) category.

6. Capital requirements

In the final guidelines, the RBI said that a payments bank should have paid-up equity capital of Rs 100 crore. They will also be required to maintain a minimum capital adequacy ratio of 15%.

7. Restrictions on lending

Payments banks will not be permitted to lend to any person including their directors. However, they may lend to their own employees out of the bank’s own funds, as per a board approved policy outlining the caps on such loans.

8. Product approval

Payments banks have to submit to RBI a list of financial products they intend to offer while submitting application for a licence. Any new products proposed should be intimated to the RBI for information. The RBI may also place restrictions on design, functioning and other features of the product. It may even discontinue the product.

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