It has been a season of setbacks for Paytm, one of India's most storied startups. While its stock has been hitting fresh lows since it listed in November 2021, the fintech company is now in the crosshairs of the banking regulator. The Reserve Bank of India (RBI) barred Paytm Payments Bank last week from onboarding new customers, based on “certain material supervisory concerns observed in the bank”, causing widespread speculation around what were the exact reasons for the regulator to take such an action.
While a Bloomberg report ascribed this to Paytm allowing data to flow to Chinese firms abroad, Paytm founder Vijay Shekhar Sharma firmly denies this.
In an interview with Moneycontrol, Paytm’s founder and CEO Vijay Shekhar Sharma refuted the claims that the company has been sharing data with Chinese firms and said that the fintech company is compliant with RBI’s data storage norms and all data is stored within India.
Sharma owns 51 percent of Paytm Payments Bank which houses the company’s wallet, Unified Payments Interface (UPI), deposit accounts, debit cards and FASTag. While analysts have said that a pause on onboarding customers for the Payments Bank is equivalent to a pause on Paytm itself, Sharma said that this is unlikely to have a major impact on the company’s revenues.
Sharma added that he does not have any substantial concerns around RBI’s directive impacting the chances of the company getting a Small Finance Bank licence, which it will be eligible for in May 2022 after the Payments Bank licence completes five years.
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He also clarified that the RBI directive does not stop Paytm from onboarding new UPI customers, a channel which is a key customer acquisition funnel for the payments player. However, Sharma did not divulge the exact supervisory concerns that led RBI to issue the directive. Edited excerpts.
A report quoting sources has said that the annual inspections by the Reserve Bank of India found Paytm's servers were sharing information with China-based entities that indirectly own a stake in Paytm Payments Bank. What is it pointing towards? Ant Financial? Could you elaborate what happened?
It is a completely malicious, false and scrupulous statement not substantiated by any facts. Paytm is completely compliant with data localisation norms and has no server whatsoever outside India.
So basically all the data is stored in India and there is no link with China?
I want to call out that it is an absolutely malicious story which does not corroborate the facts of the business that we are in. I want to say this clearly – this is stemming from malicious intent. Not just that, it is absolute rubbish.
Usually, the RBI sends a show cause notice which gets converted into a ban if not complied with. What was so urgent that RBI had to immediately ban the bank from onboarding new customers?
Your information is not true. There is nothing else I can say. I can't give more details because it is the RBI's process.
Are you saying that a show-cause was sent?
I'm not supposed to say what the RBI does. But I can completely say this is not true. People are interpreting this to the next level. RBI's processes are well-respected and understandable. Paytm is not a small-time bank, it is now a publicly-listed company.
What is meant by material supervisory concerns? What's the seriousness of the situation?
There is no public definition of material supervisory concerns. But in the points they have shared with us, they have said that there are material supervisory concerns and that is why we have a task to do.
When the RBI asked HDFC Bank or Mastercard to stop onboarding new customers, issue new credit cards, it very clearly spoke about the violations and problems. But this vague reference to material supervisory concern actually is creating more confusion. You have clarified that it is not related to any data leaks. So, what exactly is the RBI telling you?
Again, I cannot say what is material supervisory for RBI or not. We are continuously onboarding new customers because UPI onboarding is still on. We are not onboarding new incremental wallet, current accounts or savings accounts customers (Paytm Payments Bank).
The timeline that they have given us to make the amendments is not very lengthy for the things they have pointed out and then we have to get the audit done. So we should be able to do it in the stipulated timeline.
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And as far as Paytm is concerned, which is a publicly-listed company, its business is not banking, its business is payments.
You said you will adhere to the deadlines. Take us through what the deadlines are.
I am obligated by the stated confidentiality else would have shown you the letter.
Do you think this directive could be a speed bump to convert the Payments Bank licence to a Small Finance Bank licence?
I have said this during our IPO process and I would like to clarify again – Paytm’s business model is not dependent on the Payments Bank receiving a Small Finance Bank license. In other words, there is absolutely clear understanding that our credit business is based on a disbursement and technology model, not on a book ownership model. The only thing the small finance bank will get is loans.
I'm sure you also know that we are profitable in Payments Bank by design itself, while many others have called out that there is no model, it is not viable etc. Now, anyway Paytm Payments Bank was not going to apply for the licence immediately, or even as soon as we become eligible for it.
But, would you like to lend from your books when you get that licence?
100% not.
You will be eligible for the Small Finance Bank licence by May 2022. What is your deadline to apply for it?
I will look at it when I personally have the bandwidth to do this. Currently there is a lot to do with the existing payments businesses the Payments Bank handles. So the point is that I do not believe that credit is the core business model for Paytm Payments Bank. That will make it a bank’s model, not Paytm’s model.
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So, I would like to clarify that we are not applying for the Small Finance Bank licence immediately.
RBI has also asked you to appoint an IT audit firm to conduct a comprehensive audit of your IT systems. By when are you likely to appoint an audit firm?
What RBI wants is for us to get everything in order, then inform them and then appoint the IT audit firm. So, at this point we cannot appoint the firm. That is the sequence of events as told to us by the RBI.
This is not the first time Paytm Payments Bank has fallen afoul of RBI regulations. What steps are you taking to strengthen controls?
RBI itself calls out exactly the things that we are supposed to strengthen. So, we will do the things that RBI has suggested.
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