The Reserve Bank of India (RBI) took decisive action against Paytm Payments Bank on January 31 due to its blatant disregard for regulatory standards and compliance requirements. This action was prompted by serious concerns regarding the commitment to transparency by both the promoters and the group, according to an individual familiar with the situation who spoke on the condition of anonymity.
“The RBI’s current action aims to safeguard the financial system and prevent a payment bank, a regulated entity by the RBI dealing in public funds, from operating in a manner detrimental to the interests of its depositors, customers, and other stakeholders” the source stated.
On January 31, the RBI imposed significant business restrictions on Paytm Payments Bank including the cessation of accepting fresh deposits and conducting credit transactions after February 29. This decision followed the central bank’s move in March 2022 to prohibit Paytm Payments Bank from onboarding new customers.
Key issues leading to the regulatory action included major irregularities in Know Your Customer (KYC) procedures, exposing customers, depositors, and wallet holders to significant risks. These irregularities encompassed the absence of KYC for a large number of customers PAN validation failures and the use of a single PAN for multiple customers.
During its investigation, the RBI discovered instances where the same PAN was linked to over 100 customers, and in some cases, to over 1,000 customers. The volume of transactions associated with these accounts exceeded regulatory limits for minimum KYC pre-paid instruments, raising concerns about money laundering.
The regulator noted an unusually high number of dormant accounts which were susceptible to being used as mule accounts for illicit activities. Deficiencies in KYC processes and the absence of a transaction monitoring system further raised concerns about money laundering risks.
“In numerous cases, accounts and wallets were frozen by various Law Enforcement Authorities across the country due to their involvement in digital frauds” the source revealed.
The RBI also found that Paytm Payments Bank’s financial and non-financial business was intermingled with its promoter group companies, violating licensing conditions and RBI directives. The bank’s reliance on the IT infrastructure of its parent company remained absolute, with no operational segregation. Many transactions were routed through apps owned by the parent entity, raising concerns about data privacy and sharing.
Furthermore, the bank was found to have submitted false compliance reports on several occasions, which were later discovered to be inaccurate by RBI supervisors and external auditors. Significant intra-group transactions and related party transactions were not disclosed, and the bank’s payables to its parent company were substantial but undisclosed in its financial statements.
Following the RBI’s action, Paytm’s shares plummeted on the stock markets, experiencing lower circuits for two consecutive days. An email seeking comments from Paytm Payments Bank regarding the RBI’s actions remained unanswered at the time of writing.
Paytm Payments Bank Limited (PPBL) received a bank license from the RBI in January 2017 to operate as a payments bank. Its operations began in May 2017, offering services such as wallets, savings accounts, prepaid instruments, and the National Common Mobility Card.
The RBI’s frustration stems from a history of non-compliance by the company. Within one year of commencing operations, Paytm Bank violated certain licensing conditions, including breaches of day-end balances in customer accounts, non-maintenance of arm’s length in business transactions with its group entities, and serious KYC violations.
Payment banks are allowed to hold up to Rs. one lakh per customer, a limit increased to Rs. 2 lakhs since April 8, 2021. In response to non-compliance, restrictions on opening new accounts were imposed in June 2018, lifted in December 2018 based on compliance submissions and undertakings by the bank.
However, serious KYC AML (Anti Money Laundering) violations were observed by the RBI in late 2021. Despite attempts to address deficiencies, the bank’s compliance submissions were incomplete and false on numerous occasions.
In March 2022, the RBI imposed supervisory restrictions on PPBL, halting the onboarding of new customers and appointing an external audit firm to conduct a comprehensive system audit. Despite the availability of the auditor’s report in late 2022, the bank failed to take necessary corrective actions.
In response to the RBI’s action, Paytm stated that it is working to comply with RBI directions promptly, including addressing concerns with the regulator. The company estimated the worst-case impact on its annual EBITDA (Earnings before interest, taxes, depreciation and amortization ) to be between Rs. 300-500 crore, but it expressed confidence in continuing its path to profitability.