Tug of War Between Paytm and RBI

Tug of War Between Paytm and RBI
Tug of War Between Paytm and RBI

Paytm company has become the talk of the town these days as RBI is cracking down on its business operations. Those in the know say that the Reserve Bank of India's technical audit exposed accounting and supervisory issues caused by data and money traffic flows between the highly regulated Paytm Payments Bank Ltd. and the rest of the Paytm universe. According to those who asked not to be named since the issue is private, the regulator had previously notified Paytm about these problems, but they have not been remedied.

Those in the know also alleged that the regulator became concerned about the bank's and Paytm's shared management structures. They noticed that the same group of senior executives were representing both the bank and the fintech firm as a whole, which raised concerns about possible biases.

Citing ongoing noncompliance and supervisory concerns, the Reserve Bank of India (RBI) issued an order to Paytm Payments Bank, a subsidiary of Paytm and 49% owner of the parent firm, on January 31, 2024, ordering it to cease operations, including its popular mobile wallet business. The part of the bank that handles payments for the massive Paytm brand was ordered by the regulator to cease all banking operations as of February 29.

A 20% Decline in Paytm Share Price
Fintech Players Supporting Paytm
Paytm Experiences an Effect of ₹300-500 CR EBITDA

A 20% Decline in Paytm Share Price

Stock in the affiliated company, One 97 Communication, fell below 20% the day after the Reserve Bank of India (RBI) forbade Paytm Payments' Bank from accepting deposits and conducting credit transactions, including top-ups, in any customer accounts, wallets, FASTags, or other instruments after February 29.

On the National Stock Exchange, the stock price plummeted 19.99%, reaching Rs 609. On the BSE, it dropped 20% to Rs 608.80, its lower circuit limit. Following many brokerages' downgrades of the stock, the company's market capitalization dropped 9,664 crore rupees to 38,664 crore rupees in early trade.

According to an analyst call by One97 Communications, the parent company of Paytm, the company is collaborating with partner banks to expand its financial services and payments business. The CEO and creator of Paytm, Vijay Shekhar Sharma, has stated categorically that the firm will reduce its reliance on its affiliate, Paytm Payments Bank.

"Marketing business services are not affected due to these directions," Sharma said, adding that OCL and PPSL are already in the process of shifting nodal accounts to other banks. Companies will collaborate with major banks, according to Milind Deora, president and group financial officer, who also offers these services to other consumer-facing businesses.

Fintech Players Supporting Paytm

Despite RBI’s strong crackdown on the fintech firm, many fintech players have come out with strong support for Paytm. There has been a lot of support for the Paytm founder from other company founders and VCs.

Some members of the startup community have spoken out against the RBI, claiming that it has an unsupportive attitude towards financial technology companies.

Following a protracted period of non-compliance with central bank regulations regarding customer due diligence, fund usage, and technology infrastructure, the Reserve Bank of India (RBI) has decided to block new deposits into Paytm Payments Bank accounts and other popular digital wallets starting in March.

Co-founder of BharatPe Ashneer Grover vented his anger at the RBI in a tweet, calling the limits imposed on Paytm "Doglapan."

Extending his disappointment, Grover wrote on X “I don’t understand RBI. Clearly RBI does not want FinTechs in business - of late all regulations / moves are against Fintechs. Such moves will kill the sector altogether. The @FinMinIndia @nsitharaman @PMOIndia need to step in. Startups have been biggest creators of market cap and employment in last decade. Today IIM and IIT are struggling to place people - we as a country cannot afford such overreach ! Tom-Tom-Ing  @UPI_NPCI to the world and punishing pioneers in the space is pure ‘Doglapan’ !”

Ashneer Grover on X

The prime minister's office, the finance ministry, and Nirmala Sitharaman, the finance minister, are among the important authorities that Grover urged to swiftly resolve the issue because such regulatory restrictions could hinder the expansion of fintech in India.

Capitalmind CEO Deepak Shenoy was shocked by the RBI's judgment and drew comparisons to the bank's handling of the Yes Bank issue.

Paytm Experiences an Effect of ₹300-500 CR EBITDA

According to brokerage Macquarie, Paytm Payments Bank's capacity to provide loan and payment products and retain customers will be significantly hindered by RBI's restrictions.

Macquarie analyst Suresh Ganapathy noted, "We think revenue and profitability implications in the medium- to long-term could be significant and remain a key item to monitor. I couldn't agree more."

The RBI is essentially taking away Paytm's PPI (pre-paid instrument) license, according to Ganapathy, since there is no immediate plan to fix the issues.

"Lending partners may reevaluate their relationships with Paytm moving forward due to the company's poor standing with the regulator," he added further.

One97 Communications and Paytm Payments Services Ltd's nodal accounts must also be terminated by February 29, according to RBI's Wednesday announcement.

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