Paytm Crisis: Here is why RBI clamped down on Paytm

Major issues leading to the present action:

The regulator found that there are major irregularities in KYC, which exposed the customers, depositors, and wallet holders to serious risk. These include the absence of KYC for a very large number of customers (running into lakhs), PAN validation failures in lakhs of accounts, and single PAN used for multiple customers, the person quoted above said.

During its probe, the RBI found that in thousands of cases, the same PAN was linked to more than 100 customers and in some cases to more than 1,000 customers; the total value of transactions - running into crores of rupees, much beyond regulatory limits in minimum KYC pre-paid instruments raising money laundering concerns.

Also,  the regulator found that there was an unusually high number of dormant accounts which are prone to have been used as mule accounts. Further, there are also concerns relating to money laundering arising from deficiencies in the KYC processes and lack of transaction monitoring system of the bank.

"In lakhs of cases, the accounts and wallets have been frozen by various Law Enforcement Authorities across the country, as such accounts were used for committing digital frauds," the person said.

Arm’s length not maintained in dealing with Promoter Group Entities

Further, PPBL’s financial and non-financial business was co-mingled with its promoter group companies in violation of licensing conditions and RBI directions on the matter, the person quoted above said.

"PPBL’s dependence on the IT infrastructure of OCL remained absolute and there was no operational segregation. Many transactions were routed through the parent entity-owned apps, raising serious concerns on data privacy and data sharing,' the person added.

Submission of false compliance

On several occasions, the compliance submitted by the bank was found to be false upon verification, both by RBI supervisors as well as external auditors. Also, non-disclosure of significant intra-group transactions and related party transactions was found.

The bank’s payables to OCL were substantial which were not disclosed in the financial statements of the bank, the person quoted above said.  "Further, agreements were being often revised to benefit the OCL or its group companies, and detrimental to the bank and its clients," the person added.

Following the RBI action, Paytm's shares plunged on stock markets hitting lower circuits for two consecutive days. On February 2, the shares ended at Rs 487.20 apiece, down 20 percent, from the previous close.

An email sent by Moneycontrol to Paytm Payments Bank seeking comments on RBI actions remained unanswered till the time of filing this copy.

Paytm Payments Bank Limited (PPBL) was issued a bank licence by RBI in January 2017, to operate as a payments bank, and its operations were started in May 2017 with its operations including wallets, savings accounts, prepaid instruments, and National Common Mobility Card.

RBI is upset with a history of non-compliance by the company

According to the person quoted above, Paytm Bank has been persistently non-compliant with regulatory guidelines, leading to material supervisory concerns from time to time.

For instance, within one year of the commencement of its operations, non-compliance with certain licensing conditions such as breach of day-end-balances in customer accounts, non-maintenance of arm’s length in business transactions with its group entities (One 97 Communication Ltd. – OCL), and serious KYC violations were observed, the person added.

According to RBI rules, payment banks could hold only up to Rs one lakh per customer, which is now enhanced to Rs 2 lakhs from April 8, 2021. Consequently, restrictions on opening new accounts were imposed in June 2018, which were lifted in December 2018 based on compliance submitted an undertaking provided by the bank.

Later, in late 2021, serious KYC AML (anti-money laundering) violations were observed by RBI.

“Despite engaging with the bank to address these deficiencies, they continued to persist. The compliances submitted by the bank were found to be incomplete and false on many occasions,” the person added.

Accordingly, in March 2022, RBI imposed supervisory restrictions on PPBL to stop onboarding new customers with immediate effect and to appoint an external audit firm to conduct a comprehensive system audit.

After the system auditor’s report was available in the later part of 2022, no serious action was visible on the part of the bank to take necessary corrective actions, the person added.

Company Response

Responding to the RBI action, Paytm informed the exchanges that it is "taking immediate steps to comply with RBI directions, including working with the regulator to address their concerns as quickly as possible.

Further, the company said depending on the nature of the resolution, it estimates the worst-case impact at Rs 300-500 crore on its annual EBITDA. "However, the company expects to continue on its trajectory to improve its profitability," Paytm added.