Paytm Payments Bank is not alone; RBI’s punitive actions in last five years

Reserve Bank of India

The recent action by the Reserve Bank of India (RBI) against Paytm Payments Bank for non-compliance with norms has made headlines. However, this is not the first time the regulator has taken such strict action on major financial institutions. In the recent past, the RBI has cracked down on major banks, non-banking finance companies, card services providers, and audit firms for non-compliance with regulations.

In the last five years, the central bank imposed major restrictions on financial institutions such as Bank of Baroda, Bajaj Finance, HDFC Bank, Mahindra & Mahindra Financial Services, SBM Bank (India), Mastercard Asia / Pacific Pte, and American Express Banking Corp. and Diners Club International, among others.

There have been restrictions imposed on carrying out recovery or repossession activity, on-boarding new customers on mobile applications, and on the disbursal of loans under specific lending products. While in some cases, the RBI has lifted restrictions,  in some other cases, the RBI restrictions remain.

Rajnish Kumar, Former Chairman, State Bank of India (SBI), said that RBI's action on the entities has been a part and parcel of its regulatory actions in the financial sector. "On the regulatory aspect, the RBI has been watching closely on entities for any compliance issues. Accordingly, penalties and actions are taken on the entities," Kumar said.

Sanjay Agarwal, Senior Director, BFSI, CareEdge, said that RBI’s actions would have no effect on the innovation of the entities. “The regulatory action would be on some lapses found in the products or services. With this, RBI would impose some monetary penalty or other action but this would not have any impact on the innovation part of the company,” Agarwal said.

Also read: Are you a Paytm Payments Bank account holder? Here’s what you can do

RBI’s action on Paytm Payments Bank

The latest RBI clampdown has come on Paytm Payments Bank.  On January 31, the RBI imposed business restrictions on the bank citing repeated violations of norms and non-compliance with multiple rules. The banking regulator barred PPBL from accepting fresh deposits and doing credit transactions after February 29.

A Comprehensive System Audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliance and continued material supervisory concerns in the bank, warranting further supervisory action, the RBI said.

No further deposits or credit transactions or top-ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, and National Common Mobility Cards (NCMC) after February 29, other than any interest, cashbacks, or refunds which may be credited anytime, the RBI said.

It, however, said the withdrawal or utilisation of balance by the customers from their accounts, including savings bank accounts, current accounts, prepaid instruments, FASTags, NCMC will be allowed without any restrictions till the available balance is exhausted.

The RBI also directed the payments bank to settle all pipeline transactions and nodal accounts by March 15 after which no transaction shall be permitted.

Action on Bank of Baroda

On October 10, 2023, the central bank asked Bank of Baroda to suspend any further onboarding of their customers onto the ‘bob World’ mobile application.

“This action is based on certain material supervisory concerns observed in the manner of onboarding of their customers onto this mobile application,” RBI said in a notification.

Following the RBI's action, the bank had suspended a few officials related to the alleged manipulation of 'bob World'. After the action on Bank of Baroda in October, 2023, digital lending business head, Akhil Handa, quit.

In July 2023, media reports said that bob World was involved in tampering with customer accounts. The report alleged that the lender linked the contact details of different people to make the number of mobile application registrations look higher than they were. The bank had termed these allegations factually incorrect.

On October 16, Moneycontrol reported that the lender may soon file a rectification report based on the former’s audit of the bob World app to the RBI.

Bajaj Finance – stopping sanction and disbursals

The RBI, on November 15, directed Bajaj Finance to stop sanction and disbursal of loans under its two lending products ‘eCOM’ and ‘Insta EMI Card’, with immediate effect.

This action was necessitated by the non-adherence of the company to the extant provisions of Digital Lending guidelines of the Reserve Bank of India, particularly non-issuance of Key Fact Statements (KFS) to the borrowers under these two lending products and deficiencies in the Key Fact Statements issued in respect of other digital loans sanctioned by the company, RBI said.

After this, the company said the Key Fact Statement is in fact being issued for the loans booked under the two lending products mentioned above.

“However, based on the supervisory concerns raised by the RBI, we will undertake a detailed review of the KFS and implement the requisite corrective actions to the satisfaction of the RBI at the earliest,” Bajaj Finance added.

Further the company said it will temporarily suspend sanction and disbursal of new loans under ‘eCOM; and ‘Insta EMI Card’.

In the October-December quarter, the non-bank lender said it had conducted a comprehensive review of Guidelines on Digital Lending and KFS and is implementing the requisite corrective actions. The company stated that it would ensure full compliance of the executive order to the satisfaction of RBI at the earliest.

“The company is committed to the highest standards of compliance and endeavours to provide seamless financial services to its customers,” the company said.

HDFC Bank

In December 2020, the central bank had asked HDFC Bank to stop all launches of its upcoming digital business-generating activities and sourcing of new credit card customers after repeated outages at its data centre, which impacted operations.

In addition, the RBI had also directed the bank’s board to examine the lapses and fix accountability.

In August, 2021, RBI had partially lifted the ban on HDFC Bank, allowing it to resume issuing new credit cards. The private lender had then said it had issued a record number of credit cards after the partial lifting of curbs.

On March 16, 2022, HDFC Bank’s Group Head of Payments, Consumer Finance and Digital Banking, Parag Rao, in an interview to Moneycontrol said, “we are thankful to the RBI for pointing out some of the areas where we needed to improve. HDFC Bank has consistently grown quarter on quarter. I will not delve into our track record of growth… We have set a legacy of good track record of growth and we continue growing and we have aggressive plans to grow”.

Also read: Paytm Payments Bank says withdrawals smooth, meeting all regulatory requirements

Other actions

The central bank also took strict action on Mahindra & Mahindra Financial Services on September 22, 2022, asking them to immediately cease carrying out any recovery or repossession activity through outsourcing arrangements, till further orders.

However, the NBFC was allowed to continue to carry out recovery or repossession activities, through its own employees.

The RBI also stopped SBM Bank (SBM) India from all transactions under the Liberalised Remittance Scheme (LRS). Later, on January 31, 2023, the curbs were partially relaxed.