Paytm Faces Profitability Distress Amid Regulatory Challenge; Brokerages Express Concerns

The Reserve Bank of India introduced further restrictions against Paytm Payments Bank on Wednesday.

"The comprehensive system audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action," the banking regulator said in a statement.

According to the regulator's statement, the following supervisory restrictions have been introduced:

• No further deposits or credit transactions are allowed in any customer account after Feb. 29.

• Withdrawal or utilisation of deposit balances is allowed without restrictions, till the extent of said balances.

• No other banking services, apart from withdrawal or utilisation of balances, are to be allowed after Feb. 29.

• The nodal accounts of One97 Communications Ltd. and Paytm Payments Services Ltd. are to be terminated at the earliest, but not later than Feb. 29.

• For transactions initiated on or before Feb. 29, all settlements need to be concluded by March 15, and no further transactions are permitted.

Given the severe restrictions imposed on Paytm Payments Bank, it will significantly hamper Paytm's ability to retain customers in its ecosystem and accordingly restrict it from selling payment products and loan products, according to Macquarie Capital Securities.

"We think revenue and profitability implications in the medium to long term could be significant and remain a key item to monitor," the brokerage said in a Jan. 31 note.

However, the company said in an exchange filing that depending on the nature of the resolution, it expects this action to have a worst case impact of Rs 300 to 500 crore on its annual Ebitda going forward.

However, the company expects to continue on its trajectory to improve its profitability, it said.

• Macquarie Capital Securities has a 'neutral' rating on the stock with a target price of Rs 650 apiece, implying a downside of 14.6%.

• The payment bank houses all 330 million wallet accounts. Given the fact that the current monthly transacting users for Paytm is 100 million and the earlier ban was for onboarding new customers, Paytm could continue leveraging Paytm Payments Bank's customer base for selling payments and financial products.

• The research firm noted that they have seen the RBI take 15 months to revoke its ban on digital business activities at the largest private sector bank.

• "We do not see any near-term solution to these problems, and this effectively means, in our view, that the RBI is indirectly revoking the PPI (pre-paid instrument) licence of Paytm," it said.

• Governance issues: The bigger issue is that Paytm has not been on the good books of the regulator, and going forward, their lending partners could possibly re-look at the relationships.

• Jefferies downgraded the stock to 'underperform' from 'buy', with a target price of Rs 500 apiece, implying a downside of 34%.

• Paytm's business impact will largely come from reputational concerns arising from governance and compliance, and hence, the path to resolution will be stronger compliance with regulations and revoking of RBI measures.

• "We recognise that Paytm has a strong moat in its merchant network (39 million total merchants, of which 10.6 million are device merchants), and that competition will take time to match".

• RBI's actions directly impact the wallet business and profitability of merchant payments businesses, which can impact Ebitda by 20-30%.

• Jefferies cut FY25–26 Ebitda by 45%, which will also delay profitability.

• Recent RBI action on group entities will keep reputational concerns elevated and limit the scale-up of lending businesses.

• Payments businesses will be impacted by reduced wallet revenues and compression of margins on account of the shift to third-party nodal accounts.

• The company’s payment aggregator licence is still pending approval, while most of their peers have received the licence.

• More recently, BNPL product growth was trimmed, and Bernstein believes regulatory pressures had a role to play there too.

• "Overall, this development highlights the regulatory overhang that surrounds the Paytm model, which in our view is the biggest risk for this business," it said in a Jan. 31 note.

• And clearly, Paytm is far from becoming a stable format (from a regulator’s perspective).

• Bernstein expects no immediate impact on their UPI payment business, which accounts for 70% of GMV.

• There is a slight risk to the Payments margin (Payment processing margin) given that some of the higher margin products (Wallets, FasTag, etc.) are dependent on the Payments bank entity (PPBL).

• There is no risk to the loan distribution business.

• Citi Research has a 'neutral' rating on the stock with a target price of Rs 900 apiece, implying a downside of 18.3%.

• Paytm will have to move all its existing nodal accounts with PPBL to another bank.

• RBI’s latest notification notes “persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action”.