RBI Cracks Down On Paytm Payments Bank Once Again, Imposes Stringent Curbs

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.

Veteran banking expert Ashvin Parekh sees this move as further proof of failure of the differentiated banking model the RBI had introduced.

"This was a very poor experiment. Differentiated banking was brought up as a way to boost financial inclusion. But over the years, barring a few, most payments and small finance banks have not delivered," Parekh said.

According to Bernstein Research, this is likely the end of Paytm Payments Bank.

"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," analysts at Bernstein said in a report on Wednesday.

The research house does not expect any immediate impact on the UPI payments business, which accounts for 70% of parent Paytm's gross merchandise value. Paytm's loan distribution business is also unlikely to be impacted.

"There is a slight risk to the payments margin (payment processing margin) given some of the higher margin products (Wallets, FASTag, etc.) are dependent on the payments bank entity," Bernstein said.

In 2022, the RBI barred the payments bank from onboarding new customers—a restriction that continues to remain in place.