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All you need to know about RBI’s restrictions on Paytm Payments Bank

In a significant order, the RBI has directed the Paytm Payments Bank to stop carrying out a wide range of activities, including further deposits, credit transactions, fund transfers and more.

The Reserve Bank of India (RBI) on January 31 issued an order banning Paytm Payments Bank Limited (PPBL) from carrying out a wide range of activities:

  • No further deposits, credit transactions, or top-ups are allowed in any customer accounts, prepaid instruments, wallets, FASTags, or National Common Mobility Cards after February 29, 2024, other than any interest, cashback, or refunds.
  • No fund transfers, Bharath Bill Pay, and UPI facility should be provided by the bank after February 29, 2024.
  • The nodal accounts of One97 Communications Limited and Paytm Payments Services Limited are to be terminated at the earliest, in any case not later than February 29, 2024.
  • Settlement of all pipeline transactions and nodal accounts (in respect of all transactions initiated on or before February 29, 2024) should be completed by March 15, 2024, and no further transactions should be permitted thereafter.

Customers of Paytm Payments Bank are, however, allowed to withdraw or use their balances in their bank accounts, current accounts, prepaid instruments, FASTags, National Common Mobility Cards, etc., without any restrictions, up to their available balance.

Why these restrictions: PPBL was barred from onboarding new customers in March 2022. Following this, multiple audits by external auditors revealed persistent non-compliance and continued material supervisory concerns in the bank, warranting the above supervisory action, RBI stated.

What is Paytm’s response?

The RBI restrictions on Paytm Payments Bank have created lots of uncertainty for Paytm customers and merchants because it provides most of the payment and banking services for Paytm including the fintech giant’s widely used UPI services.

One97 Communications Limited (OCL), which owns Paytm and has a 49 percent stake in Paytm Payments Bank, on February 1 informed stock exchanges that:

  • Paytm will move to other banks to continue providing services: Paytm will work with other banks to continue offering the various payment services and financial products that are currently being provided by Paytm Payments Bank. Paytm explained that it has already been working with various banks other than Paytm Payments Bank on various products and it will now accelerate the plans and completely move to other bank partners.
  • Merchants will not be affected: Paytm said that it offers services to merchants in partnership with several leading banks in the country. Offline merchant payment offerings like Paytm QR, Paytm Soundbox, and Paytm Card Machine will continue as usual, and Paytm can onboard new offline merchants as well, the company claimed. Meanwhile, the Paytm Payment Gateway business for online merchants will continue to offer payment solutions to its existing merchants, the company added. Paytm cannot onboard new online merchants because it was barred from doing so in November 2022 for separate reasons.
  • Nodal accounts will be moved to other banks: Paytm has said that it will move its nodal accounts currently being held with Paytm Payments Bank to other banks. A nodal account is generally used to collect payments from different bank accounts and methods of payments before forwarding them to merchants.
  • Loans, insurance, and broking unaffected: Paytm’s loan distribution, insurance distribution, and equity broking, are not affected as they are not related to Paytm Payments Bank in any way.
  • Worst-case impact of ₹300-500 crores: Paytm expects RBI’s actions to have a worst-case impact of Rs. 300 to 500 crores on its annual EBITDA (earnings before interest, taxes, depreciation, and amortization) going forward.
  • Paytm Payments Bank working with RBI to address concerns: Paytm Payments Bank has informed Paytm that it is working with the RBI to address their concerns as quickly as possible.

Frequently Asked Questions (FAQs)

Paytm held a conference call on February 1 where Vijay Shekhar Sharma (Founder and CEO), Madhur Deora (President and Group CFO), and Bhavesh Gupta (President and COO) took questions from investors. Here are some of the important questions and the company’s responses.

  1. Can users continue to scan and pay via Paytm UPI QR codes in shops? Yes. UPI payments will not be disrupted for even an hour. Any changes that will happen will be in the backend, such as migrating of nodal account.
  2. Will merchants have to change their QR codes? Paytm will have to change the VPA (virtual payment address) in the QR codes provided to merchants to another bank account from Paytm Payments Bank (@paytm handle). Paytm is figuring out which banks to change it to. It is not fully clear if Paytm will have to replace all the existing physical QR codes with new ones or if it will be able to migrate the existing QR codes to a new bank on the backend. The former will require much more resources and time. Paytm said that it is in discussion with NPCI and the RBI to find the best way to do it and will have more clarity in a week. It will be easier for new merchants that Paytm onboard as they can be provided with a QR code mapped to a different bank.
  3. Will Paytm PoS machines need to be replaced? No. Paytm PoS machines work with five to six banks. Paytm Payments Bank provided services for UPI and wallet transactions, whereas other banks provided services for debit and credit card payments. Paytm will only have to change the UPI acquiring services to a different bank on the backend, which is an easy process.
  4. Will online payment gateways provided by Paytm need to be changed? No. Similar to the PoS case above.
  5. Will merchants with accounts in Paytm Payments Bank have to move to a different bank? Yes. Merchants that receive payment settlements in a Paytm Payments Bank account will have to change to another bank account. Paytm is nudging merchants to change their bank accounts from their app, but for those who don’t, the company’s on-ground team will step in to help merchants.
  6. How long will it take Paytm to sort this out? It should take Paytm only a few days and it should be done much before the February 29 deadline that Paytm Payments Bank has. Most of the work is deciding on new banking partners and integrating with them.
  7. Where does Paytm expect to lose money? Paytm expects RBI’s actions to have a worst-case impact of Rs. 300 to 500 crores annually if it is unable to sort out the issues. The main area where Paytm will lose money is in the wallet business where Paytm earns when users add money to their wallet and when online and offline merchants pay commission for receiving payments from Paytm wallets. Paytm is also pausing its lending business briefly, which could have an impact on revenues.
  8. What is the future of the Paytm wallet? For new users who create wallets, Paytm will offer these wallets in partnership with another entity that has a prepaid payment instrument (PPI) license. For existing users, who have wallets with Paytm Payments Bank, Paytm will have to figure out how to migrate them. It will need RBI’s guidance on this migration.
  9. Will Paytm lose UPI incentives because of moving to other banks? No. Paytm has agreements with other banks for incentive sharing that are largely similar to the one that it had with Paytm Payments Bank.
  10. Where is Paytm moving its nodal accounts to? Paytm already maintains nodal accounts with other banks for various purposes. For the nodal accounts maintained with Paytm Payments Bank, Paytm is still deciding on which bank to shift them to. It has received interest from three banks and is in discussion with them from both a commercial and technological point of view.
  11. How will the lending business be affected? The lending business is unrelated to Paytm Payments Bank so it will not be affected. The only impact is that some merchants who have borrowed loans might have their repayments coming from a Paytm Payments Bank and they will have to register mandates from other banks instead.
  12. Will Paytm face any loss in data insights? No data sharing existed between Paytm and Paytm Payments Bank in the past or the present. So, the data insights Paytm gets will not be less in any manner.
  13. What will happen to Paytm FASTags? Paytm issues FASTags from banks other than Paytm Payments Bank. It will continue to issue new FASTags under these partnerships. For users that have a FASTag issued by Paytm Payments Bank, Paytm will have to figure out a way to migrate them.
  14. Why has RBI taken this action against Paytm Payments Bank? RBI has not shared any additional info with Paytm apart from what is publicly available. Paytm Payments Bank is in discussion with the RBI but it cannot share these details with Paytm.

What were the irregularities at Paytm Payments Bank?

While neither RBI nor Paytm Payments Bank has shared any details about what exactly caused RBI to take this drastic action, media outlets have reported multiple reasons.

“Reserve Bank of India had found 31 crore out of 35 crore Paytm Wallets inoperative in its inspection, cases where a single PAN card was linked to thousands of accounts, absence of KYC for lakhs of accounts and violation of KYC-anti money laundering rules, instances of false compliance reports being submitted by the bank, PPBL’s financial and non-financial business co-mingled with its promoter group companies in violation of licensing conditions, and many other red flags, which pushed the regulator to put stringent curbs on the bank, bringing its operations to a standstill,” CNBC TV-18 reported. Similar allegations were reported by Reuters, MoneyControl and NDTV

Indian Express reported that concerns around data sharing with China-based entities, which were brought up first when RBI  barred Paytm Payments Bank from onboarding new customers in March 2022, remain. Paytm had denied these allegations back then.

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We’ve also covered previous regulatory actions taken against Paytm below that could explain the road leading up to the current situation.

Paytm’s history of compliance issues

This is not the first time Paytm has found itself in hot water with regulators:

  • Ban on issuing FASTags: In January 2024, the Indian Highways Management Company (IHMCL), an arm of the National Highway Authority of India (NHAI), barred Paytm Payments Bank from issuing fresh FASTags.
  • Fine for KYC and cybersecurity violations: In October 2023, RBI imposed a fine of Rs 5.39 crore on Paytm Payments Bank for non-compliance with the central bank’s Know Your Customer (KYC) directions, licensing guidelines, and cybersecurity framework.
  • Ban on onboarding merchants: In November 2022,  Paytm’s subsidiary, Paytm Payments Services Limited (PPSL), was barred from onboarding new online merchants to its payment aggregator business.
  • Ban on onboarding customers: In March 2022, the RBI directed Paytm Payments Bank to stop onboarding new customers.
  • Fine for providing false information: In October 2021, the central bank imposed a penalty of ₹1 crore on Paytm Payments Bank for providing false information when applying for a Certificate of Authorisation (CoA).

Reactions on the internet

While the full impact of RBI’s move is being studied, many have indicated that this could be the end for Paytm Payments Bank. “For all practical purposes . . . ends the operations of Paytm Payments Bank,” Bernstein analysts noted. “RBI gives Paytm Payments Bank a death sentence,” The Ken posted on X.

MediaNama Editor Nikhil Pahwa called RBI’s action inconsiderate and urged Paytm to take them to court:

Many entrepreneurs also voiced their support for Paytm and its founder and CEO Vijay Shekhar Sharma and criticised RBI:

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Madhav, co-founder of The Arc, posted that Paytm Payments Bank gave Paytm a leg-up against competitors, but now that is gone:

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Additional Reading List

  • Paytm Fiasco Shows the RBI Doesn’t Understand Payments (Andy Mukherjee)
  • View: RBI is not fit to regulate digital payments (Nikhil Pahwa – MediaNama Founder and Editor/Economic Times)
  • India’s Paytm CEO meets RBI, finance minister amid regulatory concerns (Siddhi Nayak/Reuters)

Note: This story is being continually updated as new information emerges. The original was published on January 31, 2024. The post was last updated on February 8, 2024, at 11:30 am.

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