Paytm Payments Bank instructed to cease operations by the end of February

The Reserve Bank of India (RBI) ordered Paytm Payments Bank on Wednesday to stop providing banking services, including accepting deposits and processing payments, within the following month. Fundamental transaction services made through Paytm's various platforms, such as the Unified Payments Interface (UPI), IMPS, Aadhaar-enabled payments, and other channels, have been put on hold by the central bank as of February 29.

The RBI's latest action is part of ongoing initiatives to guarantee stability and compliance in the financial industry.

The disciplinary action, which affects the app's users and the larger business community that relies on Paytm's network for payment processing, payroll, and other quasi-banking operations, is considered unprecedented in the financial industry.

Understanding the Definition and Functions of a Bank

Established in 2015, Paytm Payments Bank is a specialized banking entity that acquired its license during the introduction of payment banks in India. The bank commenced its operations in November 2017. While payment banks have the authorization to accept small deposits, limited to 200,000 Indian rupees ($2,400), they are prohibited from engaging in lending activities. Deposits in payment banks are required to be invested in government securities or kept as deposits in other banks.

Ownership of Paytm Payments Bank and Its Relationship with Paytm

Paytm owns a 49% majority share in Paytm Payments Bank. Vijay Shekhar Sharma, the founder and chief executive of Paytm, owns the remaining 51%.

Paytm Payments Bank serves as one of Paytm's most important financial allies. Notably, Paytm Payments Bank is in charge of overseeing the money kept in the company's well-known digital wallets.

Macquarie Capital points out that under its parent company, the bank manages all 330 million wallet accounts. This suggests that the funds maintained in these accounts are deposited within the payments bank's actual infrastructure. Digital wallets, which allow users to save money for small-scale retail transactions, are becoming more and more popular in India for regular payments.

What were the triggers and what actions did the RBI take?

The Reserve Bank of India (RBI) declared on Wednesday that it would be illegal for Paytm Payments Bank to take deposits, offer credit services, or facilitate fund transfers from February 29 onwards. Although not directly involved in lending, the payments bank does provide credit products via other companies.

To support its ruling, the RBI cited "persistent non-compliance and continued material supervisory concerns in the bank," but it did not elaborate on what exactly these concerns were. Similar problems had forced Paytm Payments Bank to impose restrictions on new customer additions in March 2022, but the bank had continued to serve its current clientele. According to the most recent directive, the bank must conclude the majority of its activities by the end of this month.

What is Paytm planning to do?

Paytm will take steps immediately to comply with the RBI's directions, the fintech company said in a statement on Thursday. As a result, it expects a worst-case impact of 3 billion Indian rupees ($36.12 million) to 5 billion rupees to its annual earnings before interest, tax, depreciation, and amortisation (EBITDA).

PAYTM's Implications: Effects on the Business

Paytm is anticipated to face significant repercussions primarily due to reputation concerns arising from governance or compliance issues. Jefferies recommends addressing these issues by enhancing adherence to regulations.

The recent decision by the Reserve Bank of India (RBI) to suspend the operations of Paytm Payments Bank is seen as a detrimental development, adding to the ongoing regulatory obstacles confronting Paytm's business, as highlighted by analysts at Macquarie.

Is Paytm Payments Bank capable of managing cash outflows?

As per sources, Paytm Payments Bank holds its deposits in government bonds and deposits at other banks, ensuring easy access to liquidity. The source stated that the bank might not require a specific liquidity line from the central bank.

Conclusion:

In conclusion, the financial sector has been rocked by the Reserve Bank of India's order to stop Paytm Payments Bank's banking services. The app's enormous user base is impacted by the historic change, which also has wider ramifications for the business community that depends on Paytm's network for essential financial operations.