Paytm in Peril? What led to RBI's crackdown on Paytm Payments Bank?

Money laundering concerns and questionable dealings of hundreds of crores of rupees between popular wallet Paytm and its lesser-known banking arm had reportedly led the Reserve Bank of India to clamp down on tech poster boy Vijay Shekhar Sharma-run entities. In a major action against PPBL, the Reserve Bank on 31 January directed the lender to stop accepting deposits or top-ups in customer accounts, wallets, FASTags , and other instruments after 29 February. The central bank has ordered PPBL to halt most of its business including taking further deposits, conducting credit transactions and carrying out top-ups on any customer accounts, prepaid instruments, wallets, and cards for paying road tolls after 29 February. This means customers can access their existing deposits and pay for services with money stored in their wallets till 29 February. And in case the RBI does not relent, the top-up for Paytm wallet will stop and transactions through it would no longer be carried.

Here’s what went wrong for Paytm Payments Bank Ltd (PPBL). Violations of licensing conditions The operations that led to the crackdown began when PPBL first obtained a banking license in January 2017 to offer wallets, savings accounts, prepaid cards, and National Common Mobility Card services. Within a year of operations, the bank saw its first regulatory strike, despite its encouraging start after the demonetisation of 2016. The RBI temporarily stopped accepting new accounts in June 2018 due to violations of licensing requirements, such as failing to maintain day-end balances and failing to follow know-your-customer (KYC) regulations, according to CNBC-TV18 which cited several people who are aware of the situation. On the other hand, this prohibition was removed by December 2018 thanks to the bank’s pledge and compliance report. Submission of false compliance PPBL was fined Rs 1 crore by the RBI after it was discovered in October 2021 that the company had filed false information. “On examination of PPBL’s application for issue of final Certificate of Authorisation (CoA), it was observed that PPBL had submitted information which did not reflect the factual position… RBI determined that the aforementioned charge was substantiated and warranted the imposition of a monetary penalty,” RBI had said in a notification on 20 October 2021. RBI restrictions and monetary penalties Later, in late 2021, the RBI noticed significant KYC AML (anti-money laundering) violations. “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,” a person familiar with the development told Moneycontrol. Accordingly, in March 2022, RBI again imposed supervisory restriction on PPBL in March 2022, to stop on-boarding new customers with immediate effect and to appoint an external audit firm to conduct a comprehensive system audit. Later in 2022, when the system auditor’s report was released, the RBI discovered that the bank had not taken any significant steps to implement the required corrective measures. As a result of PPBL’s persistent disregard for KYC regulations, the RBI fined the company ₹5.39 crore by October 2023, marking the fourth time it had done so. The regulator raised a number of issues, including inadequacies in the video-based customer identification procedure (V-CIP), breaches of regulatory ceilings, problems in identifying beneficial owners, and supervision of payout transactions. Irregularities in KYC, digital frauds and money laundering risks According to a report by PTI, the PPBL, had lakhs of non-KYC (Know Your Customer) complaint accounts, and in thousands of cases, single PANs were used for opening multiple accounts. There were instances where the total value of transactions – running into crores of rupees, was much beyond regulatory limits in minimum KYC pre-paid instruments raising money laundering concerns, sources told PTI. According to an analyst, Paytm Payments Bank has about 35 crore e-wallets. Of this, about 31 crore were dormant while only about four crore would be operative with either no balance or a small balance. An unusually high number of dormant accounts are prone to have been used as mule accounts. So, there were major irregularities in KYC, which exposed the customers, depositors and wallet holders to serious risk. PTI sources said the RBI in 2021 detected serious KYC Anti Money Laundering violations and the bank was directed to address these deficiencies. However, they continued to persist. [caption id=“attachment_13680272” align=“alignnone” width=“640”] Users will be able to use the Paytm FASTag after 29 February, however, a few things have changed. Image Courtesy: paytm.com[/caption] Data privacy risk The RBI’s revelation of the group’s financial and non-financial enterprises being combined with its promoter group entities in violation of bank guidelines and licensing requirements only worsened the matter. Concerns regarding privacy and sharing were brought up by the PPBL’s reliance on the IT infrastructure of One 97 Communications Limited (OCL), as per a report by CNBC-TV18. “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,” one of the people told the news channel. Paytm founder Vijay Shekhar Sharma holds 51 per cent of the shares of Paytm Payments Bank, with One97 Communications owning a substantial 49 per cent stake. The apparent lack of separation between these businesses has sparked regulatory worries since it may have allowed some money and data to be transferred between them even though such exchanges should be prohibited. Lack of transparency The regulator’s worries about the PPBL were heightened by the bank’s promoters’ record of non-transparency. The compliances submitted by the bank were found to be incomplete and false on many occasions, sources said, according to PTI. Further escalating regulatory concerns were reports of significant transactions inside the group and related parties that were not disclosed. The person told Moneycontrol that the bank had significant payables to OCL that were not shown in the bank’s financial statements. “Agreements were being often revised to benefit the OCL or its group companies, and detrimental to the bank and its clients,” the person said. ED raids and probes There are several cases where the accounts and wallets have been frozen by various law enforcement agencies across the country as such accounts were used for committing digital frauds. As part of a clean-up exercise, the Enforcement Directorate (ED) in September 2022 had conducted raids at the premises of PPBL and its parent entity One97 Communications Ltd (OCL) and other payment aggregators, the news agency reported. The ED had initiated a probe under the criminal sections of the Prevention of Money Laundering Act (PMLA) after a number of instances of gullible debtors ending their lives came to the fore from various states. It was alleged that the illegal digital loan companies sourced all personal data of the loan-taker at the time of downloading these apps on their phones. The agency had said the alleged proceeds of crime in the case were routed through e-wallets and some other payment aggregators. Paytm’s response When contacted, a PPBL spokesperson said, “We can confirm that neither we nor One97 Communications Ltd’s founder-CEO have been the subject matter of investigation by the Enforcement Directorate regarding money laundering.” Occasionally, some merchants on the platforms have been the subject of inquiries, and the company cooperate fully with authorities in such instances, the spokesperson said. “We would like to set the record straight and deny any involvement in anti-money laundering activities. We have and continue to abide by Indian laws and take regulatory orders with utmost seriousness,” Paytm added in a regulatory filing, as per Hindustan Times. The ED will probe Paytm Payments Bank if any evidence of illegal activity is found, Revenue Secretary Sanjay Malhotra told Reuters. CAIT issues cautionary advice for users The Confederation of All India Traders (CAIT), a trade association, advised Paytm users to move to alternative payment apps as a caution. It stated that traders should use payment platforms other than Paytm for transactions pertaining to their businesses. CAIT noted, according to HT, “The Reserve Bank of India has imposed certain restrictions, prompting CAIT to recommend that users take proactive measures to protect their funds and ensure uninterrupted financial transactions. Large number of small traders, vendors, hawkers and women are making payments through Paytm and as such RBI restrictions on Paytm could lead financial disruption to these people.” OCL shares plunged The Paytm brand’s parent company, OCL, saw a 40 per cent decline in share price over the previous two days after the RBI director. On Friday, the stock plunged 20 per cent to Rs 487.05, the lowest trading limit permissible for the day on the Bombay Stock Exchange. Over two days, the market capitalisation (mcap) of the company increased from Rs 17,378.41 crore to Rs 30,931.59 crore. With inputs from agencies