Why Paytm President and COO Bhavesh Gupta resigned

On May 4, Gupta resigned from Paytm and said he would continue to be in his position until the end of this month, transitioning to an advisor. On May 6, the first working day after the announcement, Paytm shares were down 5 percent, hitting the lower circuit.

RBI blow 

The RBI’s action against Paytm perturbed the latter's lending partners. In a move to shore up the confidence of those partners, Paytm paused its lending programme for a couple of weeks. However, even now, three months into the crisis, half the partners have not restarted lending on the Paytm platform, one of the sources cited above said.

“Sharma sees this as the culmination of a series of missteps by Gupta, starting from the middle of the last financial year,” said a second source, who has a business relationship with Paytm.

Paytm did not offer any specific comments on the reasons behind Gupta’s resignation and directed Moneycontrol to its statement shared with the exchanges.

"Your information is purely fictitious. We are committed to emerging even stronger from every challenge and achieving our targets with renewed strength and determination. Our teams, dedicated and working hard, have been with us for more than half a decade, continue to work with great strength towards our shared goals. We urge for responsible reporting, as speculative narratives only serve to undermine the integrity of factual journalism," a Paytm spokesperson said in an email statement.

Lending contributes to almost a quarter of Paytm’s revenue and even more to its margins.  So, the longer the partners stay away from Paytm, the worse the impact on the topline and bottomline.

Soon after the RBI action, in an investor concall, Paytm said that the regulatory action would likely have an annual EBITDA impact of Rs 300-500 crore on the company’s financials. However, multiple sources familiar with the situation said the impact would be much bigger, and more likely to be in the range of Rs 750-1,000 crore for the year.

“It is not going to be as low as Paytm first mentioned because of the cascading bad publicity due to media reports. However, it is not going to be as bad as a few analysts and experts are predicting. The situation got worse only in March,” said one of the the persons cited above.

When bad gets ugly

While the dramatic slowdown in lending happened after the PPBL fiasco, the cracks first started showing in the second quarter of the last fiscal year. After several statements from the RBI on the high growth of unsecured loans, Paytm slowed down personal loans in that quarter. However, soon after reports by credit rating agencies and analysts on the high level of consumer indebtness started appearing, it was clear that the central bank was more concerned about small-ticket loans below Rs 50,000.

By late November, one of Paytm's key partners, Aditya Birla Finance, stopped lending to Paytm Postpaid (short term small-ticket loans) customers. While Paytm said it had taken the decision to stop lending, a senior bank executive told Moneycontrol that it had more to do with the higher NPAs, which had spooked Aditya Birla and other lenders on the platform.

According to a report on lending by investment bank Macquarie, which was released last November, the NPAs for loans disbursed through fintech platforms crossed the single-digit boundary and ran into double digits. In an investor concall, Paytm maintained that its asset quality was good and the decision to reduce the volume of Postpaid by half was meant to respect regulatory concerns.

Net non-performing assets also entered double-digit territory for certain partners of Paytm and they stopped lending through the platform, according to a senior fintech executive.

According to the second source quoted above, Sharma felt blindsided by the contours of the partnerships that the company's executives stitched together with the lenders.

While Paytm never had any first loss default guarantee (FLDG) agreements with its partners, the company’s commissions were based on collection efficiency, or rather how much Paytm was able to collect from the borrowers.

“Sharma found these deals to be extremely complex and not in favour of Paytm, especially when NPAs rose. However, Gupta was confident that since the credit scores were decent, the company would still be able to come out on top,” the person added.

The boom 

Paytm earns around 3.5 percent margin as a commission for facilitating lending on its platform. Apart from making money on providing collection services for financial institutions, which is often in the range of 0.5 percent to 2 percent, based on collection efficiency, higher repayment netted better commissions for Paytm. The company had independent partnerships with each of the lenders and often depended on the negotiations.

The second quarter of FY24 was the peak period for Paytm’s lending business, and it was distributing loans worth around Rs 16,000 crore in a quarter.

The company's loan book is almost the envy of a few mid-sized private sector banks. For instance, the personal loans portfolio of IndusInd Bank is around Rs 5,000 crore a quarter. Federal Bank does Rs 8,000 crore in a whole year.

To be sure, Paytm is only a platform facilitating loans and not a lender. Its payment commissions are similar to the net interest margin (NIM) banks enjoy.

Though financial services revenue is around a quarter of Paytm's quarterly revenue, this is a high-growth vertical. While Paytm's payment services revenue grew only 28 percent on an annualised basis during the September quarter, the financial services segment saw 64 percent growth during the same period. Revenue from the vertical stood at Rs 571 crore.

On top of this, lending is a high-margin business and has helped Paytm reduce its losses substantially over the last four quarters or so. For a non-lender, a margin of 3.5 percent looks large, often close to the NIM large banks manage. For instance, the country’s largest private sector bank, HDFC Bank, has an NIM of 4 percent.

"These are digitally driven, with no manual intervention. There is also a lot of cross-selling happening and that seems to be working well. The short-duration loans also have similar margins while the turnaround time is often three months and hence highly remunerative," Nitin Aggarwal, head of banking and financials research at brokerage Motilal Oswal, told Moneycontrol last November.

The PPBL impact

While PPBL is only an associate company and Paytm has severed all financial partnerships with the company, it still held a few important keys to the businesses Paytm was running. The successful Fastag business, the mobile wallet business and even the key to UPI operations ran through PPBL.

Some customers and merchants were using PPBL savings accounts to settle or repay loans taken through Paytm. Since customers needed to close their accounts, this was another disruption in Paytm’s lucrative lending business. Collections were impacted.

Since the Paytm app’s UPI services were powered by PPBL, the stoppage of the latter's banking services meant that Paytm had to partner with banks to become a third-party app, much like its rivals Google Pay and PhonePe.

Paytm generates around three-fourth of its gross merchandise value (GMV) from UPI and it is hence important that the company maintain its UPI marketshare for topline growth. However, the PPBL crisis resulted in Paytm’s UPI market share dropping by 3 percentage points in a couple of months from around 12 percent in January to 9 percent in March.

The migration of customer UPI accounts from PPBL to four banking partners has been slower than expected. Paytm has been offering cashbacks to customers to accelerate the transition.

Some of the loan repayments were auto-deduct and also linked to the @paytm UPI handle, which is now being changed to the banks' handles. Customers therefore need to sign up for new UPI handles and then enable auto-deduct for these handles as well. This has also caused a disruption in loan repayments, much to the disappointment of Paytm’s lending partners.

A more hands-on approach

A source close to Paytm said that Sharma is likely to be more hands-on and will closely monitor every single business division of Paytm until things go back to where they were during Q2 of the last financial year.

A former senior Paytm executive said that over the last couple of years, Sharma had given the top management full freedom as it had done consistently well in the merchant vertical, which was bringing the company good revenue from the soundbox and subscription business. The lending business was the cherry on the top. Despite a lower UPI market share, Paytm’s monetisation was kicking in with more than 25 percent growth in revenue every quarter.

However, within two quarters, things went from good to bad to worse, giving Sharma a rude shock. According to one of the sources quoted above, Sharma believes he was not given a true picture of the graveness of the situation involving the payments bank, its impact on Paytm's business, and the indirect impact on the collections of its lending business.

“Several senior executives failed to anticipate the impact of the RBI action on PPBL, and by extension, on Paytm,” said the second source quoted earlier.

Sharma seems to be trying to reverse the slide and indicated this in as many words at the Tokyo conference: “It is important for you, yourself, to be taking care of it versus just letting a teammate or an adviser suggest what it should be."