When Raghuram Rajan bet on payments banks

India’s crisis-stricken fintech darling Paytm, currently under fire on Dalal Street due to a regulatory curb by Mint Street, was once seen as spearheading a banking revolution in India by many. However, former Reserve Bank of India Governor Raghuram Rajan warned of innovative firms’ likely discomfort with regulatory bodies.

RBI, which has sought to galvanise India’s banking sector through innovation, said it wanted to see where innovative firms could push the system. RBI through a discussion paper in August 2013 saw the need for niche banking in India following which licenses were issued to applicants.

Paytm’s founder Vijay Shekhar Sharma was among the 11 applicants who were given an in-princple nod by the RBI to set up a payments bank back in August 2015. Paytm Payments Bank is an arm of One97 Communications Limited (OCL), which holds 49 per cent of PPBL. Sharma holds a 51 per cent stake in the bank.

It maybe noted that Vodafone’s MPesa, Aditya Birla Money and Tech Mahindra did not get into the business despite getting their bank licenses.

“We are taking a bet on payment banks. Paytm is an innovative firm and innovative firms are not always comfortable with the regulators. But we want to see where they push the system and so they have a payments bank licence,” said Rajan in August 2016, who served as the 23rd RBI Governor between September 2013 and September 2016.

“For a number of years, we have been saying that a banking revolution is needed. The revolution is upon us today,” he claimed then.

“The easiest thing to say is ‘No’. When there is uncertainty then it is easy to say No. But saying no prevents the system from developing. What should be the preferred thing to say is that wait, we should watch it and see how better the regulation can evolve,” Rajan said at the same event while launching Unified Payments Interface (UPI).

Through a Facebook post, Paytm responded kindly to the encouragement, saying “We are truly humbled by the words of the RBI governor Raghuram Rajan, who believes in our innovation.”

Yet, insiders tell ET that RBI’s curb was no surprise as it had been brewing for the past seven years or so. Some of the complaints against Paytm include violation of banking compliance norms on money laundering, conflict of interest, maintaining an arm’s length from the parent, lax processes allowing fraud, and licensing agreement breaches, ET reported.

Paytm, pushed the system too far?

SoftBank Group-backed Paytm has remained under RBI’s regulatory scanner for the last two years. Two years ago RBI asked Paytm to not acquire new customers, the primary issue being a lack of compliance with Know Your Customer (KYC) norms. Poor KYC adherence can lead to a surge in financial frauds, an additional headache for investigative agencies as it can lead to digital dead-ends.

A case of one account linked to one PAN number operating over a hundred wallets has also been reported.

ALSO READ: Paytm merchants migrate to rivals, bank users move accounts

Following multiple warnings, the central bank asked the fintech company to stop its mobile wallet business citing persistent non-compliance and supervisory concerns.

RBI’s technical audit into the functioning of the fintech found money and data traffic flows between Paytm Payments Bank and the rest of the Paytm universe that created accounting and supervisory problems, news agency Bloomberg reported citing sources. Furthermore, RBI was also reportedly uncomfortable with management overlap between the bank and other parts of Paytm.

Dalal Street did not respond kindly to RBI’s missive, after which it has seen over $2 billion worth of market value wiped off.

Paytm, which was listed in November 2021 at an IPO issue price of Rs 2,150 per share, was trading at Rs 438 a piece on February 5, 2024, a drop of 72 per cent since listing. Macquarie analysts in a note wrote that the RBI order “significantly hampers Paytm’s ability to retain customers in its ecosystem, and accordingly restricts it from selling payment products and loan products.” Research firm Jefferies has reduced the target price to Rs 500 from Rs 1,050.

ALSO READ: Paytm still karo? How a startup star became a cautionary tale

Refuting rumours, the company was forced to issue a stock exchange clarification on Sunday denying the Enforcement Directorate‘s investigation into the company and founder Sharma for money laundering. “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,” the filing said.

The RBI’s orders have spooked the merchants linked to Paytm and buoyed the businesses of rivals like PhonePe and Google Pay, which are currently offering them the opportunity to port their Paytm accounts to their own platforms at no cost, ET reported.

Paytm FAQs

1. Will my Paytm be affected?

Paytm founder Shekhar Sharma said that Paytm app will continue working beyond February 29. RBI’s directive only affects Paytm Payments Bank

2. Can I add money to Paytm wallet?

Customers can accept or receive funds till February 29. After that you can withdraw or transfer funds from Paytm wallet or Paytm Payments Bank until available balance is exhausted

3. Will my Paytm UPI continue working?

Use of UPI channel on Paytm app can be done without any restrictions.

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