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  • 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.
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