The story so far: In a major blow to fintech services provider Paytm, the Reserve Bank of India (RBI) barred its payments bank subsidiary, Paytm Payments Bank Ltd (PPBL) from obtaining further deposits and top-ups in its accounts or wallets from February 29. PPBL was barred from on-boarding news customers back in March 2022. The latest move was after an audit report had revealed “persistent non-compliances and continued material supervisory concerns in the bank”.
What has the RBI instructed?
The RBI has disallowed the Paytm subsidiary from accepting further deposits, top ups or credit transactions into its operated wallet or accounts from February 29. This also applies to its prepaid instruments for FASTags and National Common Mobility Cards (NCMC) cards. Present customers would, however, be allowed to use their existing balances to avail the services. The payments bank, according to Macquire Capital, houses the parent company One97 Communication (OCL)’s more than 330 million wallet accounts. In other words, transactional money is held in the wallets of the payments bank.
Further, PPBL has been prohibited from carrying out any banking services (in the nature of services like AEPS, IMPS etc), bill payments and UPI. It has also been directed to “terminate at the earliest”, or before February 29, 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 for holding money from participating banks — from the consumer’s side, and ultimately remitting to the specific merchant.
Lastly, the regulator has asked the subsidiary to settle all pipeline and nodal accounts transactions by March 29. No further transactions shall be permitted thereafter. Equity researchers at Macquire Capital believe the move may result in revenue and profitability implications in 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 accordingly restricts it from selling payment and loan products,” its note read. More importantly, with no near-term solution in sight, the researchers opine the regulator is “indirectly revoking the PPI (prepaid instrument) license of Paytm”.
The parent company expects the latest action would have a “worst case impact” of ₹300 to ₹500 crore on its annual EBITDA (earnings before interest, taxes, depreciation, and amortisation).
How is Paytm looking to transition?
The company informed that it would now be working with other banks and not with PPBL. It further intends to expand third-party bank partnerships for merchant acquiring services (providing essential infrastructure for acquiring merchants for helping them access payments) with other banks. As enumerated by the President and Chief Operating Officer (COO) Bhavesh Gupta, the migration is to unfold in three stages. The first of it would entail finding an interested partner bank to integrate with the necessary Paytm ecosystem. Second, assessing the ensuing commercial viability and finally, facilitating the account-to-account migration which could be time-consuming given, as he stated, “the time is short”. The other option would be a one-time migration.
Specifically about 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 higher cost. Lending context, its note observed, “nearly all” of Paytm’s merchant gross merchandise value was being settled through with PPBL positioning as the nodal account. Further, this could also impact payment business revenues owing to reduced wallet revenues and compression of margins with a third-party involved.
What are the concerns?
The first set of concerns relates to its licensing. RBI guidelines for licensing of payments banks stipulate that entities cannot undertake lending activities. PPBL does not lend directly. Instead, it provides credit-dispensing products from third parties.
The other issue relates to its governance structure and related party-transactions. For perspective, Paytm owns 49% of PPBL. The remainder is held by founder Vijay Shekhar Sharma. OCL in its initial response put forth that, adhering to banking regulations, PPBL is “run independently” by its management and board. It further argued against having exerted any influence on the subsidiary’s operations other than as a minority board member or shareholder. It further communicated having “reconfirmed” with founder that he has not taken any margin loans or pledged any shares – directly or indirectly owned by him.
Researchers at Macquire observed the bigger issue arose with the company not being in the good books of the regulator. In fact, on Thursday, RBI Governor Shaktikanta Das said regulated entities are initially nudged to take corrective action and are given sufficient time. However, when that does not work, “effective action” is taken, such as “imposing supervisory or business restrictions”. Furthermore, as learnt from sources, Mr. Sharma also met Finance Minister Nirmala Sitharaman recently. Therein too, he was told “in no uncertain terms” to comply with the directives and regulations. Going forward, it held, their lending partners could potentially re-look the relationships. Earlier, the RBI had penalised the subsidiary ₹5.39 crore for flouting KYC norms. Furthermore, news publication NDTV Profit recently learnt that over 1,000 accounts were found to be linked with the same PAN to their accounts. Thus, creating concerns about money laundering. Revenue Secretary Sanjay Malhotra told Reuters that should any fresh charges of money laundering emerge against Paytm from the RBI, they would be investigated by the ED.