Why Did RBI Bar Paytm Bank From Taking on New Customers? Does This Impact Paytm?

Here's what the RBI have said is the reason for the decision, and how it was able to do this.

Paytm, which was last valued at $16 billion, is seeking to raise Rs16,600 crore from the IPO.

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The Reserve Bank of India (RBI) on Friday, 11 March, directed Paytm Payments Bank Ltd "to stop, with immediate effect, onboarding of new customers."

The RBI's direction prevents Paytm Payments Bank from taking on any new customers, though this can be allowed if the RBI grants them specific permission, after reviewing a report by specially appointed IT auditors.

The 'bank' has been directed to appoint an IT audit firm to conduct a comprehensive system audit of its IT system.

Why Has The RBI Imposed This Restriction?

The RBI's statement says that "This action is based on certain material supervisory concerns observed in the bank."

In October 2021, the RBI had slapped a Rs 1 crore penalty on Paytm Payments Bank for deficiencies in information filed for regulatory compliance.

According to the central bank, on examination of their application for issue of final 'Certificate of Authorisation' (CoA), it was observed that the submitted information did not reflect the "factual position".

Where Does RBI Get The Power To Impose Restrictions Like This?

The RBI exercised its powers under Section 35A of the Banking Regulation Act 1949 to give directions to banks for management of their affairs.

The objective of the provision is "to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company".

Since there were concerns about the impact on depositors if there were problems with KYC and IT compliance, the RBI was able to exercise this power here.

Has This Action Been Taken Against Any Other Banks?

This is the second time that the RBI has prohibited Paytm Payments Bank from onboarding new customers. In 2018 it had been directed to stop doing so after deficiencies were found with its KYC processes for new customers.

As the Economic Times reports, Paytm Payments Bank has joined Mastercard, Diners Club, American Express and HDFC Bank in facing regulatory action by the central bank over "non-compliance and system glitches."

When Paytm Payments Bank was hit with the Rs 1 crore penalty in October 2021, the RBI also imposed a Rs 27 lakh fine on Western Union Financial Services Inc for failure to comply with master directions on financial transfers.

How Will This Move Impact Paytm?

The RBI's directions do not at this time affect Paytm Payment Bank's existing customer base or the broader Paytm business. As a result, Macquarie Research believes the ban won't impact Paytm's brand and customer loyalty, Business Standard reported.

However, the regulatory action does scupper any plans for business growth for Paytm Payments Bank, which had reportedly included expanding its customer base to 500 million.

Macquarie Research has also said that this development will reduce Paytm's chances of obtaining a small finance bank license (which would allow them to start lending, which they currently cannot do), for which they could have been eligible in May this year.