Reserve Bank of India (RBI) has reassured that the recent decision to prevent Paytm Payments Banks from accepting deposits is a result of a supervisory action, with restrictions aligned to the seriousness of the situation. According to senior RBI officials, including Deputy Governor Swaminathan J, such measures are preceded by months of bilateral engagement, offering regulated entities ample time to address issues and safeguard consumers, thereby ensuring the stability of the financial system.
While concerns have arisen about the potential impact on the entire fintech industry due to actions against Paytm, RBI Governor Shaktikanta Das dismissed these fears, affirming that the matter pertains specifically to a particular institution and does not pose a threat to the overall system. Governor Das clarified the situation, stating, "There is no concern about the entire system; it is an issue specific to an institution." He underscored the current stability of the financial system, though cautioning individual entities to be mindful of potential long-term repercussions.
Emphasizing the existence of regulations and ruling out any regulatory deficiency, Das pointed out that the issue lies in compliance with various parameters. However, he refrained from providing specific details, stating, "I don't want to specify the details." Governor Das reiterated that the imposed restrictions on Paytm Payments Bank align with the severity of the situation, emphasizing the responsibility of a regulator to take actions in the best interest of customers and the overall system.
Governor Das further explained the RBI's approach, highlighting the bilateral engagement with entities, urging compliance, and resorting to business restrictions or supervisory actions only when necessary actions are not taken. He emphasized that such actions are proportional to the gravity of the situation, ensuring a responsible regulatory approach aligned with the well-being of the system and customers.
Paytm Is Actively Seeking Bank Partnerships
Meanwhile, One97 Communications Limited, the parent company of Paytm, is actively seeking bank partnerships to transfer all accounts from Paytm Payments Bank Limited (PPBL). However, reports indicate that numerous public and private sector bank executives are hesitant to engage in this business collaboration. This reluctance follows recent regulatory actions by the RBI that temporarily halted PPBL's banking operations, allowing customers only to withdraw existing balances. Banks are awaiting regulatory guidance before committing to any partnership.
Senior executives from both private and public sector banks express reservations about collaborating with Paytm in light of the RBI's actions. They seek clarification from One97 Communications Limited regarding the issues leading to the regulatory intervention and demand transparency before proceeding. One97 Communications Limited aims to transfer merchant and customer accounts, along with the UPI address managed by PPBL, to ensure continuity within the Paytm app during the transition to a new backend sponsor bank.
Despite Paytm reaching out to leading banks, concerns arise due to the RBI's statement highlighting compliance and supervisory lapses. Bank executives emphasize the complexity of migrating PPBL accounts, requiring new KYC processes, and express concerns about merchant KYC issues. Additionally, the absence of a Merchant Discount Rate (MDR) raises questions about the financial viability and incentive for banks to undertake such a risk.
In response to the reports, Paytm denies the information, stating it is factually incorrect and unfounded. The company asserts positive progress in expanding relationships with multiple third-party banks over the past two years.
Reports suggest that the RBI raised concerns about PPBL's non-compliance with full KYC for customers, older accounts, and exceeding allowable balances in payments bank accounts. Fintechs, including Paytm, faced issues related to crypto transactions and reporting high-value suspicious transactions under the Prevention of Money Laundering Act (PMLA).
Bankers express willingness to undertake the project only if mandated by the RBI and National Payments Corporation of India (NPCI), citing the need for regulatory approval. As the situation unfolds, regulatory bodies are urged to consider major banks, such as HDFC Bank, Axis Bank, ICICI Bank, and SBI, for potential collaboration and migration. The uncertainty surrounding the situation poses challenges not only for banks but also for NPCI, which seeks to diversify market share in the UPI ecosystem. The potential departure of merchants and customers from Paytm further increases concentration risks on the platform, raising concerns among stakeholders.
The current state of affairs raises alarms for the NPCI and accentuates the concentration risk associated with the Unified Payments Interface (UPI) platform. The urgency of the developing situation is heightened by time constraints and the necessity for regulatory decisions.
NPCI has been actively promoting the adoption of additional UPI apps to diversify market share away from dominant players like PhonePe and Google Pay, which currently command approximately 85 percent of the value market share and 80 percent of the volume market share in the ecosystem. However, in the aftermath of the events from the previous week, where a significant number of merchants and customers distanced themselves from Paytm, the concentration risk on the platform has further escalated.
This situation is complex as banks express readiness to assume control of merchant and customer accounts, but they harbor reservations about transactions occurring within the Paytm app.
On February 3, State Bank of India (SBI) chairman Dinesh Khara stated that while the bank is engaging with PPB merchants for onboarding, further actions, such as acquiring a stake in PPB, are not currently under consideration. Khara emphasized the need to scrutinize balance sheets, governance, and related factors before making such decisions. Despite this, SBI remains open to supporting the merchant community by offering Point of Sale (PoS) machines and QR codes to ensure minimal disruption.
Other bankers, including those from private sector banks, expressed uncertainty when approached by the media. Concerns have arisen regarding KYC compliance, presenting banks with the monumental task of re-evaluating the extensive paperwork associated with over 330 million accounts, as reported.
Industry sources suggest that some banks are reconsidering their existing relationships with the fintech firm. According to reports, at least one major non-banking financial company (NBFC) is awaiting clarification on the shift of merchants from the Paytm platform and has ceased offering its loan products through the application.
Customer Perspective: Challenges, Options, and Deadlines
While customers have the flexibility to migrate to alternative wallets, critical services such as loan distribution, insurance, and equity broking are expected to remain unaffected. Paytm has assured users that its UPI service will continue without disruption, collaborating with other banks to implement necessary backend changes for seamless service. Despite recent restrictions, Paytm emphasizes that users do not need to take additional actions.
Paytm clarifies that the RBI’s order does not impact user deposits in savings accounts, wallets, FASTags, and NCMC (National Common Mobility Card) accounts. Users can continue utilizing existing balances without any hindrance. However, during an earnings call recently, Paytm's top management acknowledged working on a migration plan for users of PPBL, wallets, FASTags, etc., with other banks.
Customers are informed that Paytm Wallet balances can be utilized until exhausted after February 29, with no option to add funds thereafter. This restriction also applies to PPBL accounts, FASTags, and other linked services, but withdrawals and transactions remain unrestricted.
Given the multitude of banks and non-banking entities providing wallet services (over 20), customers are encouraged to explore alternatives such as Mobikwik, PhonePe, SBI, ICICI Bank, HDFC, and Amazon Pay. Furthermore, 37 banks offer FASTag services, including popular choices like SBI, HDFC, ICICI, and Airtel Payments Bank.