The story so far: In a blow to fintech services provider Paytm, the Reserve Bank of India (RBI) has banned its payments banking subsidiary, Paytm Payments Bank Ltd (PPBL), from taking further deposits and top-ups into its accounts or wallets. starting February 29. It was banned from onboarding news clients in March 2022. The latest move came after an audit report revealed “persistent noncompliance and continuing material supervisory concerns at the bank.”
What has the RBI ordered?
The RBI has prohibited subsidiary Paytm from accepting any further deposits, recharges or credit transactions in its wallet or operated accounts from February 29 onwards. This also applies to its prepaid instruments for FASTags and National Common Mobility Cards (NCMC). However, existing customers will be allowed to use their existing balances to avail the services. The payments bank, according to Macquire Capital, hosts the more than 330 million wallet accounts of parent company One97 Communication (OCL). In other words, the money from the transactions is kept in the payments bank’s wallets.
Furthermore, PPBL has been prohibited from carrying out any banking services (in the form of services like AEPS, IMPS, etc.), bill payments and UPI. It was also ordered to “terminate as soon as possible”, or before February 29, the nodal accounts of its parent company and Paytm Payments Services. Nodal accounts are a type of bank account opened by businesses (financial intermediaries) and are used to store money from participating banks, from the consumer side and ultimately remit it to the specific merchant.
Finally, the regulator has asked the subsidiary to settle all nodal and pipeline account transactions by March 29. From then on, no more transactions will be allowed. Equity researchers at Macquire Capital believe the move may have implications for revenue and profitability over the medium to long term. “Given the severe restrictions imposed on PPBL, we believe it significantly hampers Paytm’s ability to retain customers in its ecosystem and consequently restricts it from selling payment and lending products,” its note said. More importantly, with no short-term solution in sight, researchers are of the view that the regulator is “indirectly revoking Paytm’s PPI (prepaid instrument) license.”
The parent company expects the latest move to have a “worst-case impact” of Rs 300-500 crore on its annual EBITDA (earnings before interest, taxes, depreciation and amortization).
How does Paytm expect the transition?
The company informed that it would now work with other banks and not with PPBL. Additionally, it intends to expand third-party banking partnerships for merchant acquisition services (providing essential infrastructure to acquire merchants and help them access payments) with other banks. As listed by President and Chief Operating Officer (COO) Bhavesh Gupta, the migration will unfold in three stages. The first would involve finding an interested partner bank to integrate with the necessary Paytm ecosystem. Secondly, evaluate the resulting commercial viability and finally facilitate the migration from account to account, which could take a long time given that, as he stated, “time is short.” The other option would be a one-time migration.
Specifically regarding the nodal account transition, brokerage firm Jefferies expects this could have an impact on margins as Paytm will have to pay for these services at a higher cost. In the credit context, its note observed, “almost all” of the gross commercial value of Paytm merchandise was settled through the positioning of PPBL as a nodal account. Additionally, this could also impact the revenue of the payments business due to reduced revenue from wallets and compression of margins with a third party involved.
What are the concerns?
The first set of concerns relates to your license. The RBI guidelines for licensing payments banks stipulate that the entities cannot carry out lending activities. PPBL does not lend directly. Instead, it offers third-party credit granting products.
The other issue relates to its governance structure and related party transactions. For perspective, Paytm owns 49% of PPBL. The rest is in the hands of founder Vijay Shekhar Sharma. OCL in its initial response stated that as per banking regulations, PPBL is “independently managed” by its management and board of directors. Furthermore, he argued that he had not exerted any influence on the subsidiary’s operations other than as a minority board member or shareholder. Furthermore, he reported having “reconfirmed” with the founder that he had not taken out any margin loans nor had he pledged any shares, directly or indirectly, owned by him.
Macquire researchers noted that the biggest problem arose when the company was not in the regulator’s good books. In fact, on Thursday, RBI Governor Shaktikanta Das said that regulated entities are initially urged to take corrective action and given sufficient time. However, when that does not work, “effective measures” are taken, such as “imposing supervisory or trading restrictions.” Additionally, sources learned, Sharma also met Finance Minister Nirmala Sitharaman recently. There he was also asked “in very clear terms” to comply with the directives and regulations. In the future, he maintained, his lending partners could potentially review relationships. Earlier, the RBI had penalized the subsidiary Rs 5.39 crore for violating KYC norms. Furthermore, the publication of news NDTV Benefit I recently learned that more than 1000 accounts were found to be linked with the same PAN to their accounts. Thus creating concerns about money laundering. Finance Secretary Sanjay Malhotra said Reuters that if fresh charges of money laundering were to arise against Paytm by the RBI, they would be investigated by the ED.