Opinion: Paytm Payments Bank throws up complex and unusual challenges for RBI

Paytm’s top leadership, according to industry insiders, was simply not taking the central bank seriously despite the lender having been barred from onboarding new customers since March 11, 2022.

The Indian Supreme Court has sometimes been described as the most powerful apex court in the world. Whether or not that’s true, the credibility of another storied institution, India’s central bank, is unquestionably at its peak, though no one has yet described it as the world’s most powerful in its category.

“Over the years, the Reserve Bank of India has established itself as an institution that stands for credibility, trust, and economic progress,” Governor Shaktikanta Das said on Thursday. Most analysts would agree with the statement and, at least to some extent, following the wide-ranging disciplinary actions against Paytm Payments Bank, even view it as an institution to be feared.

In December 2020, RBI banned HDFC Bank from issuing new credit cards, which was only lifted in March 2022. There also have been regulatory actions against Bajaj Finance and Bank of Baroda recently, though the action against HDFC Bank is the most comparable to the one against Paytm Payments Bank.

Thursday’s post-monetary policy press conference, not unexpectedly, saw almost as many questions on Paytm Payments Bank as there were on the future trajectory of interest rates. Both Governor Das and Deputy Governor Swaminathan Janakiraman made it clear the regulator had engaged with Paytm Payments Bank for close to two years and that their patience had run out.

The central bank, which had deftly handled the collapse of Yes Bank in February-March 2020, may have to navigate a complex terrain in the case of Paytm Payments Bank, which has been asked to stop accepting new deposits, top-ups in customer accounts and pre-paid instruments such as fast tags, among other restrictions. Many analysts say it could lose its licence.

There can certainly be questions over whether RBI fully thought through the impact on the numerous merchants, around 40 million, that use Paytm and how depositors at Paytm Payments Bank can be migrated to other banks.

Unlike the monetary policy on that day, which was extremely detailed, the RBI’s actions against Paytm Payments Bank have been spelt out in a rather sparse press release.

To be clear, there’s no legal requirement to give a speaking order or to issue a formal show cause notice under the RBI Act. Some startup founders have protested, claiming the move will hit India’s fledging fintech sector.

Notwithstanding all this, RBI’s willingness to take action against Paytm Payments Bank, 51 percent owned by a high-profile founder regarded by some as an emblem of the new breed of Indian entrepreneurs, speaks to its willingness and ability to act in cases of what the regulator terms “persistent non-compliance”.

Paytm’s top leadership, according to industry insiders, was simply not taking the central bank seriously despite the lender having been barred from onboarding new customers since March 11, 2022.

Since then, One97 Communications, the listed entity which operates the payment app, has scrambled to get itself into RBI’s good books, appointing a committee headed by former Sebi Chairman M. Damodaran to ensure the group “adheres to a regulatory and compliance framework.” One97 Communications owns the remaining 49 percent of Paytm Payments Bank.

As a Moneycontrol article explains, the impact on the listed entity could be dire. If Paytm cannot find a bank willing to host its wallets—currently, the wallet accounts, a staggering 330 million of them, are housed in Paytm Payments Bank—then that business will collapse.

Another type of business, nodal accounts, essentially escrow accounts that hold money temporarily while it is transferred from customers and businesses, could also collapse. There are 40 million merchants using these, according to the Moneycontrol report.

If Paytm Payments Bank loses its licence, the size of the listed company will shrink significantly.

All this makes Paytm Payments Bank somewhat different from the usual bank failure, such as Yes Bank (where the incumbent management was booted out and a new set of shareholders, notably State Bank of India, inducted) or Laxmi Vilas Bank, which was taken over by Singapore-based DBS.

The RBI may well have to step in to ensure an orderly migration of Paytm Payments Bank’s business if it is inclined to suspend or cancel its licence. It can look at a merger with another payment bank.

In his statement, the RBI governor spoke of the central bank’s “tireless efforts towards maintaining a fine balance among price stability, financial stability and external stability”, which had “paid rich dividends as the country embarks on a higher growth trajectory in the years to come.”

The statements also allude to RBI becoming a “pioneer in fostering innovation and technology in the financial sector,” But such innovation is often executed by companies and entrepreneurs who tend not to care about rules.

The original model for Paytm and other fintechs is Alipay, the Alibaba-owned payments platform that provides a range of services such as micro-loans and travel booking. Not surprisingly, Paytm has sometimes been referred to as India’s Alipay. The latter, part of the wider Jack Ma-owned Ant Group, has faced a ferocious crackdown by the Xi Jinping regime. Ant Group currently owns about 20% of One97 Communications. It has been paring its stake in response to the Indian government’s efforts to discourage Chinese investment.

“As India gains a pole position in the new global order, the contribution of the RBI is getting widely recognised in India and abroad,” the governor said.

RBI’s regulation of fintechs is set to make waves—in one way or the other.