Weekly WrapUp – RBI vs Paytm

What Has Happened?

On January 31, 2024, Reserve Bank of India (RBI) took unprecedented action by imposing stringent restrictions on Paytm Payments Bank (PPBL), effectively barring bank from undertaking any banking activities after Feb 29. This included halt on followings:   

1. Deposits
2. Credit transactions
3. Wallet top-ups
4. Bill payments
5. All other banking operations.

What's Real Reason Behind Ban? 

The RBI's decision stems from series of regulatory concerns & violations by PPBL, dating back to its inception over six years ago. 
Bank faced its first regulatory strike in 2018 due to following reasons:
• Violations of licensing conditions. 
• Non-compliance with know-your-customer (KYC) guidelines. 

Subsequent investigations revealed followings:
1. False compliance reports 
2. lapses in technology
3. Cybersecurity
4. KYC anti-money laundering compliance
5. Co-mingling of financial
6. Non-financial businesses with its promoter group companies.

What Did Paytm Do Wrong? 

PPBL's violations include cases of inoperative wallets, linking single PAN card to thousands of accounts, absence of KYC for lakhs of accounts, false compliance reports, & co-mingling of financial activities with its promoter group companies. Additionally, serious KYC anti-money laundering violations, digital frauds, & money laundering risks were identified, raising concerns about safety & security of customers' data & funds.

What's Payment Bank & How Is It Different from Regular Bank? 

A payments bank, like PPBL, is type of non-full-service bank that can accept deposits & provide payment services but cannot lend to customers. key distinction lies in limitations on lending activities. However, PPBL faced criticism for co-mingling its activities with those of its parent entity, violating licensing conditions & raising concerns about data privacy.

What's Response from Paytm Afterwards? 

In response to regulatory actions, Paytm acknowledged RBI directive & expressed commitment to addressing concerns raised. However, response lacked specific details about issues raised by regulator.

What Are Restrictions RBI Has Put on Paytm? 

The RBI has imposed complete ban on PPBL's banking activities, effective from Feb 29. This includes following:
    1. No New Deposits
    2. No Credit Transactions
    3. No Wallet top-ups
    4. No Bill Payments
    5. No Any Other Banking Operations. q
The stringent measures indicate lack of confidence in PPBL's ability to rectify identified issues.

Is Paytm Banned from RBI? 

As of now, RBI has not explicitly banned Paytm; however, it has imposed severe restrictions on Paytm Payments Bank, hindering its ability to conduct banking activities. future of Paytm's banking license remains uncertain.

What Did Sameer Arora from Helios Capital Say? 

Samir Arora from Helios Capital stated that RBI's concerns may not be about corporate governance but rather close link between regulated bank (PPBL) & non-regulated fintech entities. He emphasized need for independence between bank & fintech entity, highlighting that these two entities must be completely different from regulatory perspective. Arora downplayed impact on his fund, stating that one stock's decline does not significantly affect overall portfolio.

Paytm Bank's Rocky Road: Despite Stormy Waters, Morgan Stanley Doubles Down on Investment! 

In recent transaction on National Stock Exchange (NSE), Morgan Stanley invested Rs 244 crore in Paytm's parent company, One97 Communications. financial giant acquired 0.8% stake through its affiliate, Morgan Stanley Asia (Singapore) Pte - ODI, purchasing 50 lakh shares at average price of Rs 487.20 each.

The market response was swift, with One97 Communications' shares plummeting by 20% to close at Rs 487.20 per piece on NSE. This decline follows RBI's directive to Paytm Payments Bank Ltd (PPBL) to halt deposits & top-ups after Feb 29.

One97 Communications Ltd holds 49% stake in PPBL, classified as associate, not subsidiary. Morgan Stanley's strategic investment raises questions about Paytm's future amidst regulatory challenges. While exact motives are speculative, such moves often signify confidence in company's long-term prospects.

As financial landscape evolves, Morgan Stanley's investment in Paytm adds complexity to unfolding narrative. Market watchers will keenly observe how this move influences Paytm's trajectory & its ability to navigate regulatory hurdles.

This strategic investment underscores broader themes of confidence, adaptation, & resilience in ever-changing world of finance.

What’s the buzz going on Social Media? 

1. Mr. Ashneer Grover expressed his support to man in charge & showing dishearten feeling toward RBI.

2. Deepak Shenoy of Capital Mind.

3. Anand Sankar

4. Vijay Shekhar Sharma express his assurance of handling everything within ease of situation.

Highlights from the Paytm’s Management Commentary

1. Payments made via Paytm post-paid slowed down as anticipated; the full effect will be felt in the upcoming quarter.
2. With over 20 million people on its whitelist, Paytm is working to grow its network of platform partners and prospective clients. In the high-ticket PL market, INR 4.9 billion was disbursed in 3Q, with INR 2 billion coming in only Dec. 23.
3. Because the prepaid company has greater operating expenses, the modification of the pay-out run rate will not have a significant effect on EBITDA.

Paytm’s Valuation & View

Despite significant uncertainty, Paytm reported a stable quarter with consistent growth in GMV. Disbursements, however, saw some moderation. 

Robust revenue growth was further reinforced by strong momentum in subscription devices, which also assisted the company in creating a strong backlog for its merchant lending business. 

Due to seasonally high payment processing fees, the contribution margin somewhat decreased, but the management anticipates maintaining it in the mid-50s. 

The adjusted EBITDA exceeded expectation. 

The business is already observing robust demand in premium markets. According to experts estimates, Paytm will begin to post profits in FY26 and reach EBITDA breakeven in 2HFY25.

Key Metrics

Conclusion

Paytm's once-celebrated status in India's digital payment space is at risk, & stringent regulatory measures have raised concerns about future of its banking ambitions. company faces challenges in addressing identified issues & regaining trust of both regulators & customers.