Banking Central | End of the road for Paytm Payments Bank?

If the RBI doesn’t lift the restrictions by March 15, PPBL will turn into a dormant bank beyond March 15.

One of the major headlines of the last week was the central bank's clarification and release of frequently asked questions (FAQs) on the Paytm Payments Bank dispute.

The clarifications from the Reserve Bank of India (RBI) centred essentially around two aspects that concern consumers the most.

One, the central bank has given an additional two weeks for Paytm Payments Bank (PPBL) to wind down its business. Two, the RBI has clearly stated what the existing customers and depositors need to do for a smooth transition of the existing service to other banks.

Those with existing balance on wallets and FASTags can continue using them but can’t top up beyond March 15. Depositors need to withdraw money and move to other banks. Merchant customers can continue using sound box and QR code services if they are linked to other bank accounts.

After March 15: What's in store for PPBL?

If the RBI doesn’t lift the restrictions by March 15, PPBL will turn into a dormant bank beyond March 15. It cannot do any business. Hence, logically, the operations will come to an end.

What next? As Moneycontrol reported earlier, an announcement is likely from the RBI cancelling the working permit of PPBL after March 15 unless a

miracle takeover happens by an interested party.

That will leave only four Payments banks in India - Airtel Payments Bank, India Post Payments Bank, Fino, NSDL Payments Bank, and Jio Payments Bank.

With the crackdown on Paytm Bank, the RBI has sent a clear message to the fintechs that no matter how big a company is, non-compliance with rules isn’t an option. And that the regulator won’t hesitate to pull the plug on major violators. This is actually a lesson for fintech founders who are ambitious about their banking plans to understand compliance and regulations better.

Read an elaborate report on reasons behind the RBI action 

As the RBI has elaborated in its previous interactions with the media, Paytm Payments Bank was given enough time to rectify its long history of non-compliance on multiple issues such as KYC rule violations and AML rule breaches. With the hindsight, the actions of the PPBL board or the management were not enough to convince the regulator.

That would also mean that for Vijay Shekhar Sharma, who was one of the 11 recipients of payments bank permits in 2015, it's the end of the road in the payments bank business.

Episode brews up a few critical questions...

The whole episode raises a big question on the role of the board and that of independent directors in ensuring regulatory compliance of banking institutions. As this writer had elaborated in an earlier column, the PPBL board had veteran bankers and compliance experts with decades of experience. Yet, the board allegedly failed in its duties to make sure the management acts on compliance and regulatory areas to the satisfaction of the banking regulator.

Was the RBI action was too harsh on Paytm? There is a view that the regulator could have opted in a much less disruptive manner against Paytm by changing the management or superseding the board, instead of pulling the plug in the last minute, causing much confusion and chaos. The RBI has been engaged with the bank through the last 3-4 years with respect to rule lapses. The action has rattled the industry and the investors. Could the central bank have acted earlier?

Finally, the larger question is on the model itself. Out of the 11 payments banks which got licence in 2015, only five survives now. If PPBL loses its permit, the remaining will be only four. While the reasons for shutting down operations are different in different cases (non-viability being a major factor), the fact is that half of the initial permit holders are now not in business. Is there a case to rethink the model itself? Can Payments banks be converted to smaller full-sized banks to find a more sustainable model?

Only time will tell how the entire episode impacts the booming fintech industry in India.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.