A year after Paytm Payments Bank ban, compliance and merchant focus spark recovery hopes

Something that has taken a lot of time and effort in the last year, after a crippling order by banking regulator RBI threatened its very future.

On January 31, 2024, RBI imposed restrictions on Paytm Payments Bank Limited (PPBL), the sister company of One97 Communications that runs the popular Paytm brand. The regulator asked PPBL to stop all transactions including money transfers, deposits and top-ups through the platform, virtually rendering their operations impossible once balances in those accounts were emptied. This also meant that Paytm’s UPI operations were also in limbo as PPBL was the banking provider on the Paytm app.

Since then, Sharma has focussed on building a business model that puts compliance ahead of innovation, growth and speed.

The recent SBI partnership also indicates that financial institutions are willing to work with Paytm again. Last year, after the RBI ban on PPBL, several financial institutions were hesitant to partner with Paytm, sending its lending platform business towards collapse.

For Sharma, such pivots have happened multiple times, with the company moving from being a mobile value-added services player to a prepaid mobile wallet that popularised digital payments in the country in the last decade.

However, the rise of UPI tripped Paytm, which lost the top two spots to PhonePe and Google Pay in mobile payments. But Sharma did pivot to a UPI-first model backed by a payments bank he owned before RBI’s ban on PPBL upset the company's well-laid-out plans.

A long road to redemption

A year later, Paytm is still far from reaching the position of strength it held before the RBI’s action. The company’s monthly transacting users, gross merchandise value, the credit disbursed through its lending platform, the Unified Payments Interface (UPI) transaction volume and value have all been below the third quarter of FY 24, Paytm’s best quarter to date, also the one before RBI's action.

However, One97’s share price has crossed Rs 1,000 to reach a 52-week high of Rs 1,063 in December last year. The share price is even better than the price of around Rs 780 the company was trading at during early January 2024; before the RBI restrictions.

Some of the key operational metrics have improved dramatically. So what explains the investors’ confidence in a turnaround? A majority of analyst reports do suggest a higher target price and a buy rating.

Metrics that deteriorated

PPBL held the Paytm wallet license and since the RBI move, Paytm’s sole payments platform is the popular real-time payments platform, UPI. The company has been steadily losing market share from around 13 percent in 2023 to under 7 percent now.

The company’s monthly transacting users have fallen from more than 10 crore to around 7 crore in the latest quarter, Q3 of FY25. The company’s GMV stood at Rs 5.1 lakh crore a year ago and during the December quarter, it was at Rs 5 lakh crore.

The credit disbursed through the platform has also crashed as it had stopped small-ticket postpaid loans from December 2023, a little more than a year ago. The company was forced to wind down the business as RBI got increasingly worried about the rising delinquencies and indebtedness of the segment.

In a major reprieve, NPCI allowed Paytm to start onboarding new customers to its UPI platform as RBI considered its UPI user migration process complete. This is expected to boost its monthly transacting users over the next year or so.

Metrics that matter to investors

But the company has been getting a lot of things right, especially the metrics that investors are interested in. For instance, it is ramping up higher margin high-value personal loans and merchant loans.

“Most institutional investors are not looking at the consumer side of Paytm’s business. The company’s merchant side of business continues to grow and they can exploit that channel. They have massive feet on the street and great products and they have already proved their execution mettle as well the scale of lending opportunity that comes with it,” said Naveen Kulkarni, CIO of Axis Securities.

Even with the well-publicised controversy around the RBI ban, Paytm has managed to grow its registered merchants from 3.9 crore during the Q3 of FY 24 to 4.3 crore in the December quarter of FY 25.

The ubiquitous merchant devices including the Soundbox devices grew from 1.06 crore in the December quarter of FY 24 to 1.17 crore in the third quarter of FY 25. The company is refurbishing inactive devices and redeploying them at new merchant sites. This segment is expected to generate close to Rs 1,500 crore in topline with minimal capex.

Even as the company’s consumer-initiated UPI transaction volume has decreased, merchant transactions grew from one billion in Q3 of FY 24 to 1.1 billion transactions during the Q3 of FY 25.

From the March 2025 quarter, Paytm’s year-on-year and month-on-month growth would start looking better as 2024’s March and June quarters were probably the worst quarters since the company listed on the exchanges.

A bet on technology and scaling DSA

For most investors, the promise Paytm holds is that of a large captive consumer and merchant base whose creditworthiness can be ascertained outside of the existing models.
The company has over 4.3 crore merchants and still growing and has an edge over other competitors in this segment.

The distribution model – called direct selling agent (DSA) in industry parlance – along with the recent move to provide the default loss guarantee (DLG) to lending partners in case of default is giving comfort to lenders on Paytm's lending platform.

The DLG, which can be offered up to 5 percent of the loan value as per regulation, offers financial institutions some comfort for lending to customers with a thin credit profile.

“Paytm continues to see increased interest from lenders to partners using the DLG model for both merchant and personal loans, which will help to increase disbursements with the existing partners and expand partnerships with new lenders. About 80 percent of merchant loans came from the DLG model,” noted Motilal Oswal in a brokerage report published after the company’s latest quarterly report.

The expected credit loss (ECL) has also come down to 4.5 percent due to an improvement in collection efficiency. The higher ECL earlier was mostly due to the churn of merchants. After shutting down postpaid loans, Paytm has been accelerating merchant loan distribution with more than 50 percent of loans distributed to repeat borrowers, indicating their ability to pay and creditworthiness.

“What investors are betting on is the business-to-business (b2b) part of Paytm. None of the banks of large financial institutions have the seamless technology that Paytm has. Whether it is the soundbox or the POS machines, they are much ahead. The integration of all the products and financial services on the merchant side app increases confidence. They have proved their execution and collection is decent,” said Kulkarni of Axis.

Pricing or value is still anybody’s guess

“Will I buy it at Rs 700 (roughly the current price)? I don’t know. For investors with a two-year horizon like ours and less risk appetite, it is not a great stock. But if someone is ready to wait for five years or more, then it is,” said an investment manager with a fund.

There is no clarity on what the addressable market for lending from Paytm’s client base is, while RBI has been asking financial institutions to reduce their exposure to unsecured lending, putting hopes of high growth in check.

The investment manager added that the bet is that other financial institutions do not have feet on the street, the operational efficiency or technology that Paytm is offering at its price and the potential at the scale in a few years as the country’s GDP grows.

“The company seems to be much more stable and is rightly valued given the overall market condition. For the company to reach the IPO price, it will have to work a lot harder and it will likely need to report net profit for three to four consecutive quarters. If so, a Zomato like recovery is possible,” said a fintech founder, who previously worked with Paytm.
Other tailwinds for the company include the declining cost of devices and the company’s capital expenditure. It has also seen the headcount coming down to 32,000 from 40,000 earlier.

“Only six lakh merchants have taken financial services products from the company, which is less than 1 percent of the base - gives the confidence that Paytm will be able to expand this segment and generate revenue,” the Motilal report said. The brokerage has a target price of Rs 950 for Paytm.

The increasing cash pile, lower losses

During the current fiscal, Paytm sold its event ticketing business to Zomato for around Rs 2,000 crore. It has another Rs 2,000 crore from the sale of its stake in Paypay Japan.

“The company’s losses and capital expenditure are coming down and the high cash balance means that it has enough money to accelerate the growth and investment required for it,” said an analyst with a brokerage house, on condition of anonymity.

The company has been maintaining that it will focus on the payments, merchants and lending business, where its synergies can help the company achieve profitability by the end of next financial year.

“Paytm's strong network effects, combined with stringent cost control measures enabled the company to moderate losses on a sustainable basis despite several regulatory challenges. We forecast the company’s revenue/contribution profit to grow at 22 percent/25 percent over the next few years FY25E-FY30E. It has a solid market position, a strong balance sheet, and an improving margin profile,” said Mirae Assets in a report to investors. It has a buy rating at a target price of Rs 1,210.