RBI’s Action on Paytm Payment Bank

Context (TH): The RBI has taken corrective action against Paytm Payments Bank Ltd (PPBL).
This comes after an audit report uncovered ongoing issues and non-compliance in the bank.

What has the RBI instructed?

PPBL is prohibited from accepting more deposits, top-ups, or credit transactions in its wallets or accounts starting February 29.
This restriction includes prepaid instruments for FASTags and National Common Mobility Cards.
However, existing customers are allowed to use their current balances for services.
PPBL was terminated from performing any banking services, bill payments, or UPI transactions.
It was asked to terminate nodal accounts of its parent company.

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.

Concerns

RBI guidelines for payments banks prohibits them from engaging in lending activities. Though, PPBL doesn’t lend directly but offers credit-dispensing products from third parties, raising licensing concerns.
Previous Penalties and Money Laundering Concerns
- RBI penalized PPBL ₹5.39 crore for violating KYC norms.
- Over 1,000 accounts linked with the same PAN raised concerns about money laundering.

Impact of RBI’s action

May impact Paytm’s revenue and profitability in the medium to long term. (According to Macquire Capital).
The severe restrictions hamper Paytm’s ability to retain customers and sell payment and loan products. (According to Researchers)
Paytm’s parent company (One97 Communication) anticipates an annual EBITDA (earnings before interest, taxes, depreciation, and amortisation) impact of ₹300 to ₹500 crore.

Payment banks

Dr Nachiket Mor committee suggested to introduce specialised banks or payments bank to cater to the lower income groups and small businesses.
Need: To increase the penetration level of financial services to the remote areas of the country.
Similar to other banks but operate on a smaller scale.
What is not allowed?
- No credit risk involved. (it can’t advance loans or issue credit cards)
- They cannot accept NRI deposits.
What is allowed?
- Can accept demand deposits (up to Rs 1 lakh).
- Offer remittance services.
- Mobile payments/transfers/purchases.
- Other banking services like ATM/debit cards, net banking and third-party fund transfers.
Eligible promoters: NBFCs, individuals, corporations, mobile phone companies, supermarket chains, real estate cooperatives, and public sector entities
A promoter/promoter group can have a joint venture with an existing scheduled commercial bank to set up a payments bank.
Registered as a public limited company under the Companies Act of 2013
Licensed under Section 22 of the Banking Regulation Act of 1949.
Governed by the provisions of
- the Banking Regulation Act of 1949.
- the Reserve Bank of India Act of 1934.
- the Foreign Exchange Management Act of 1999.
- the Payment and Settlement Systems Act of 2007.
They must keep a Cash Reserve Ratio (CRR).
Required to invest a minimum of 75% of its demand deposit balances in Statutory Liquidity Ratio (SLR) eligible Government securities/treasury bills with maturity up to one year.
Need to hold a maximum of 25% in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
Minimum paid-up capital 100 crore.
Promoters’ contribution: the minimum initial contribution to paid-up equity capital must be at least 40% for the first 5 years.
Foreign shareholding: It would be as per the Foreign Direct Investment (FDI) policy.