Why RBI issued a death sentence to Paytm Payments Bank

Paytm is in hot water as the Reserve Bank of India (RBI) has cracked down on them. A recent circular from RBI states that Paytm Payments Bank won't be allowed to accept fresh deposits or carry out credit transactions after February 29.

What does this mean for users? Well, starting from that date, you won't be able to add funds to your wallet, prepaid instruments, FASTags, or National Common Mobility Cards. 

In essence, all account holders are required to empty their balances and close their accounts. After the announcement it's Paytm share price fell by 20% on Thursday.

This move will impact a significant number of users, including 300 million wallets, 30 million bank accounts, 1.6 billion UPI transactions per month, and eight million Fastags associated with Paytm Bank.

So, why is this happening? 

According to the RBI, an external audit has uncovered non-compliance with regulations and notable supervisory concerns regarding Paytm's books. The saga started in March 2022 when RBI barred Paytm Bank from onboarding new customers and mandated thorough audits of its IT systems.

In a nutshell, the RBI isn't pleased with Paytm Bank's conduct, and this crackdown is a result of regulatory and compliance issues that have been lingering since March 2022.

But why is RBI unhappy with Paytm?

Well, RBI seems unhappy with Paytm Bank, possibly due to the close connection between Paytm and Paytm Payments Bank. Although these are separate entities, their deep integration appears to be a source of concern for RBI.

Paytm, also known as One 97 Communications, holds 49% of Paytm Payments Bank, with the remaining 51% owned by Vijay Shekhar Sharma, according to the company's 2022-23 annual report. Paytm Payments Bank encompasses various Paytm services, such as wallets, UPI, utility bill payments, and deposit accounts.

The interlinking of these entities is evident in several aspects. Paytm Payments Bank can only be accessed through the Paytm app, funds from the bank are available solely through the app, and registration and login are exclusively through the app. The Paytm app is the primary platform for promoting and distributing all bank services.

Additionally, all of Paytm's 330 million-plus wallet accounts and 150 million-plus UPI handles are housed within Paytm Payments Bank. To address this, RBI has instructed One97 Communications Ltd (ONCL) and Paytm Payments Service Ltd to terminate their nodal accounts with the bank promptly. Nodal accounts are specialized accounts for accepting payments from different bank accounts and forwarding them to merchants.

Paytm anticipates a significant impact on its annual operational profit, estimating it to be between ₹300-500 crore. 

This projection is a result of customers being unable to add money to their wallets, FASTags, and other services. The restriction follows the RBI's decision to prohibit Paytm Payments Bank Ltd from accepting deposits or top-ups in any customer account.

Another point of concern for RBI is Paytm Postpaid, a buy-now-pay-later (BNPL) offering for retail users. 

While Payments Banks are limited to accepting deposits and cannot provide loans, Paytm offered BNPL services in collaboration with other lenders, offering personal loans up to Rs. 60,000 at 0% interest. This raised concerns as it involved Paytm selling products that a bank is not allowed to sell, leading to confusion among users.

What’s the road ahead for Paytm?

Paytm is facing a time crunch to protect its business, especially its UPI operations, which hold a 13% market share for both merchants and consumers.

According to The Ken, users of the Paytm app with the @paytm handle won't be able to make UPI transactions anymore, even if their UPI IDs are linked to a different bank account. This is because Paytm Payments Bank, responsible for issuing these handles, is no longer supporting them.

Offline merchants on the app are also in trouble. Most of Paytm’s merchants have their accounts with Paytm Payments bank. 

When a user scans Paytm’s QR code, the money initially goes into Paytm Payments Bank’s nodal account before reaching the merchant’s account, typically a Paytm Bank account. Now, Paytm not only needs to change the nodal account to another bank but also update the bank account information for its 37 million merchants. 

If this isn't done in time, the merchants won't receive transferred money, and their Paytm QR codes will be replaced with another.

Bernstein Research has expressed a negative outlook on the recent notifications, stating, "For all practical purposes, the above notifications end the operations of Paytm Payments Bank. This is a definite negative development and adds to the already heavy regulatory overhang on the business."

The National Payments Corporation of India mandates that high-volume payment apps, as TPAPs, partner with at least three banks. Finding banks to accommodate its volumes and get their systems ready in less than a month will be a challenge.

The future looks challenging for Paytm, with expectations of a sharp downturn in its stock in the short term due to several revenue streams halting following the RBI’s directive. Customer migration to competitors may make it challenging for Paytm to regain them even after regulatory matters are resolved.