RBI Bars Paytm Payments Bank From Adding New Customers: What Led To The Action?
Paytm Payments Bank barred from adding new customers with immediate effect.
The Reserve Bank of India has barred Paytm Payments Bank from onboarding new customers with immediate effect.
The action followed material supervisory issues at the payments bank, the regulator said in a statement on its website. The RBI, however, did not provide any details. The stricture has been imposed under the Section 35A of the Banking Regulation Act.
The Section 35A allows the regulator to prevent the affairs of any banking company in a manner which is detrimental to the interest of depositors. A payments bank can collect deposits from its customers. However, it is not allowed to extend any loans from its balance sheet.
"The bank has also been directed to appoint an IT audit firm to conduct a comprehensive system audit of its IT system," the RBI said in the statement.
Onboarding of new customers will be subject to specific permissions by the banking regulator, after it has reviewed the report by the IT auditors.
Paytm Payments Bank had received its banking licence in May 2017.
What Went Wrong?
According to a person with direct knowledge of the matter, a recent supervisory audit by the RBI had found violations in know your customer norms.
A significant number of dormant accounts were found at Paytm Payments Bank, which were opened without conducting adequate KYC on the depositors. The regulator had questioned the payments bank on this, to which the bank had responded, the person said.
However, it appears that the regulator was not satisfied with the responses it got from Paytm Payments Bank and imposed the latest strictures, the person said.
A second person familiar with the matter confirmed that the issues were related to KYC processes. Some of these issues have been persistent, this person said, speaking on condition of anonymity.
Paytm Payments Bank will appoint the IT auditor in consultation with the RBI, according to this person. The regulator will also decide the terms of reference for this auditor.
Queries emailed to Paytm Payments Bank and the RBI were not answered.
In a statement to exchanges on Saturday, the company said that Paytm Payments Bank is taking immediate steps to comply with RBI directions. The company will appoint a reputed external auditor to conduct a comprehensive system audit of its IT systems, it said.
Paytm clarified that the restrictions do not impact any existing customers of Paytm Payments Bank. “All existing users of Paytm UPI, Paytm Wallet, Paytm FASTag, and bank accounts can continue to use these instruments, including debit cards and net banking, for payments.”
The company believes that the measures imposed upon the payments bank will not materially impact Paytm’s overall business, it added.
Paytm Payments Bank's Long History Of Violations
As an RBI-licensed entity, Paytm Payments Bank is subject to regular inspections by the banking regulator. In over four years of its existence, the payments bank has had multiple regulatory strictures placed on it.
In August 2018, the RBI had taken a similar action against Paytm Payments Bank. At the time, the regulator had cited flouting of KYC norms.
Later, in December 2018, The Times of India reported that the RBI was also not happy with the close relations between the payments bank and its parent One97 Communications Ltd. Based on the RBI's response to a Right to Information Act query, the newspaper reported that Paytm Payments Bank had failed to maintain the Rs 100 crore net worth requirement and was also flouting the Rs 1 lakh deposit limit permitted per account for payments banks at the time.
According to the red herring prospectus released by One97 Communications ahead of its initial public offering in November 2021, the RBI had prepared an inspection report in January 2021 on the basis of its assessment of the bank's March 2020 financials.
The regulator found 13 violations against Paytm Payments Bank, according to the prospectus.
The RBI also found that an internal audit into critical functions was not conducted. And it flagged inadequate measures relating to KYC processes within the payments bank. In addition, certain fraud cases were reported to the RBI with some delay.
The takeover of the Bharat Bill Payments Operating Unit from One97 Communications was not concluded in time, the regulator said.
In October 2021, the RBI imposed a Rs 1 crore penalty on Paytm Payments Bank in relation to the Bharat Bill Payment Operating Unit issue. While One97 Communications had claimed that it had concluded the transfer in August 2017, the complete transfer of services was only concluded in March 2021. The regulator's penalty was imposed after it issued a show cause notice and heard out One97 Communications' response.
The story has been updated with a statement sent by One97 Communications to exchanges on Saturday.