The Reserve Bank of India (RBI) recently imposed operational curbs on Paytm Payments Bank, banning it from onboarding new customers and allowing aggregate deposits beyond the mandated cap of ₹1 lakh per account. This rare regulatory action comes after repeat violations around KYC non-compliance and shareholding licensing terms were observed during inspections.
Latest disclosures
Paytm Payments Bank
- Over 600 million mobile wallet customers
- Over 60 million bank accounts that are eligible for wallet integration
- 29 lakh accounts suspected of KYC non-compliance
RBI Enforced Restrictions on Bank
- Opening new accounts
- Allowing further credit into existing accounts
- Issuing prepaid instruments like FASTags and NCMC cards
- The impact of these curbs across stakeholders includes:
Business Viability
- Paytm expected banking revenue to touch ₹3,000-4,000 crore in next 2 years which is nearly 25% of its valuation.
- Losses may widen by over 15% in FY 2024-25 as cost structure remains intact amidst stalled revenue growth
Brand Reputation
- Paytm commands highest brand recall but restrictions risk reversing hard-earned public trust
- Effective communication on settlement channels, data privacy and business continuity plans vital now
Regulatory Prudence
- Curbs renew focus on regulating digital finance models balancing stability needs with enabling innovation
- Oversight policies must underscore ethical standards while fostering experimentation
Understanding Violations
Paytm Payments Bank stands accused of two key contraventions:
- Shareholder Licenses: RBI mandates payments banks to be fully owned by licensed entities approved under guidelines. But Paytm Payments Services Ltd, the promoter firm, does not have clearance to acquire new customers for wallets, cards and UPI handles thus violating norms.
- KYC Compliance: 29 lakh accounts were opened without adequate KYC documentation Audit showed funds flow exceeded caps per account with pooled transactions indicating proxyization.
The breaches expose oversight gaps despite systemic improvements following past penalization of peer Fino Payments Bank. However proportionality of response remains debatable.
Commercial Viability Challenges
Paytm’s payment bank planned major expansion in credit offerings this year:
- Expected secured loans and post-paid products to contribute 20-30% of its FY2025 targeted revenue of ₹10,000 crore
- Received in-principle approvals last month for lockable savings account and point-of-sale lending products
- With RBI prohibiting further deposits, these credit offerings worth thousands of crores stand compromised.
- This heightens profitability pressures given:
- Paytm already posted 8% higher losses in FY 2022-23 owing to employee, software and infrastructure costs
- Operational expenditure rose 57% YoY while banking revenue grew only 27% YoY in 2022
- Over 20% of its stock valuation comprises intangible goodwill at risk of impairment if growth halts
To reassure markets, urgent pivoting may be needed to open revenue channels while seeking new capital infusion to bridge mounting costs.
Impact on Customers
Paytm as a brand reaches over 650 million Indians today through:
- 600 million mobile wallet subscribers
- 60 million payments bank depositors
- 15 million stock trading accounts
- 5 million merchant partners
- For users, key anxiety areas around RBI restrictions include:
Settlement Continuity
- Paytm needs instantly assuring on enabling seamless KYC completion, transfers and withdrawals
- Failure risks severing financial lifeline for mobile-first banking populations
Data Security
- Comprehensive communications required on data isolation, access rights and privacy principles regarding accounts under scrutiny
Trust Deficit
- Paytm’s brand reputation peaked at 90% familiarity and 70% favorability in mid 2023
- Curbs pose reversing hard-earned goodwill built over 10 years
Proactive customer education and evidence on rights protection is vital to salvage trust.
Impact of RBI Curbs on Paytm Payments Bank
| Stakeholder | Effect Dimensions | Mitigation Pathways |
| Paytm owners | Profitability affected by stalled revenue plans | Urgent pivoting to alternative models needed |
| Investor wealth at risk with valuation pressures | Capital infusion may be required to prop numbers | |
| Customers | Anxieties around settlements, data privacy and service continuity | Effective communications strategy essential |
| Public confidence in brand likely to wane | Engagement, education and evidence required on rights protection |
Regulating Digital Finance
India’s digital payments market is expected to grow over 3 times to ₹7,092 trillion by 2025 on the back of:
- Deepening internet connectivity with 1.2 billion mobile subscribers
- UPI processing $1 trillion-plus annual transactions
- 87% bank account ownership as a result of Jan Dhan expansion
However gaps remain around customer safeguards and liability limitations in these advances.
For instance, Paytm curbs follow similar penalization of peer Fino Payments Bank over accountability issues in 2022. This demands urgent policy focus on:
- Implementing tractions around digital tokens regulation tabled in 2023
- Examining mechanisms like deposit insurance for fintech banking clients
- Enabling open banking architectures allowing interoperable data portability
- Clarifying rights and technological standards around biometrics usage spanning payments
India must balance stability and innovation through nuanced approaches like tiered licensing criteria accounting for size, customer base and operations maturity. Fostering safer experimentation alongside privacy and choice remains vital for last-mile financial access.
The Way Forward
Digital payments in India stand poised to triple in volume to 1.5 billion transactions per month over 2023-25.
Driving this growth are 600 million internet subscribers, 350 million smartphone users and surging merchants embracing electronic settlements.
With deepening adoption, ensuring customer centricity and market stability gains urgency. Hence regulators must assist sector maturation through:
- Graduated licensing criteria attuned to risk levels of activities spanning payments, credit and investment
- Interoperability mandates allowing seamless customer data portability across providers
- Enabling regulatory sandboxes where controlled test deployments inform oversight approaches
- Instilling ethics and security standards certifications tied to permitting
Paytm’s case must also spotlight recovery pathways balancing accountability and support for entities vital enabling financial access.
