Dear Readers,
This week I met many FinTech founders and CEOs at a FinTech summit in Mumbai. ‘What’s going on with Paytm?’ was the only topic to discuss for all of them. After the Reserve Bank of India (RBI) imposed a ban on Paytm Payment Bank Limited (PPBL), what will happen to Paytm after February 29 is what everyone wants to know. This week itself, RBI during its post Monetary Policy press conference addressed the Paytm issue. Governor Shaktikanta Das along with the Deputy Governors defended their action against Paytm.
They said such actions are preceded by months or even years of bilateral engagements. “We are giving time to regulated entities to take necessary actions,” the Governor said. While RBI’s clarification is important, I have two thoughts. Paytm was too casual and RBI too harsh? Let me explain.
Paytm: chivalrous attitude?
Let me first talk about Paytm. All those who know Vijay Shekhar Sharma must have seen him in a casual outfit in an unstitched shirt with jeans and sneakers. While the compatriots are beneficiaries of his innovation, for FinTech founders he is a role model. They followed him ardently.
At one of the Nasscom events at Bengaluru, Kunal Shah, Founder of CRED, said, “Let Vijay succeed. Let him define the path. It will open many doors for others.” He spoke in the context of valuation and profitability. Industry wanted VSS to succeed so they could follow him. From acquiring customers to processing payments to raising funds, Paytm has had the speed that perhaps every new-age company would want. The dynamics changed after IPO as the market expected Paytm to show profits but the stock never hit the level from where it started its journey on the stock markets. Just three months after the listing, the RBI issued its first directive in March 2022 and prevented Paytm Payment Bank (PPBL) from getting new customers. It also directed Paytm Bank to appoint an IT audit firm for a comprehensive System Audit and its IT system. RBI has mentioned that they are doing it due to supervisory concerns. Later, the banking regulator imposed a penalty of Rs 5.39 crore on the PPBL.
Were these two actions not enough for PPBL to put its house in order? Why has Paytm failed to meet the norms in the last two years is the biggest question the industry has. Wasn’t VSS serious? The constant non-compliance of the RBI is a big blame on Paytm which no regulated entity would want to take. In fact, in an interview with a TV channel, former ED of RBI said that it is a disaster in the making since October 2023 and they did not get to know it despite many warnings.
By now we have all learned that there is a possibility of major discrepancies and not just a KYC issue. The RBI was really concerned about who the payments were getting and what was the procedure for risk profiling of those customers.
Mostly, gaps and irregularities in KYC change to business accounts with PAN cards is what we all have learned. But if you think rationally, the action of the regulator is bigger than that. Are things related to AML true? To what extent has duplication of PAN cards been used and what benefits are the merchants taking? Were there any issues with reporting AML-related transactions? There are many such problems with huge consequences.
What also surprises me is that Paytm Bank has highly reputed board members and independent directors in the risk committee. It is unlikely that they were unaware of the situation as news of the ban and criminal charges were in the public domain. So, were the board members deliberately silent? While VSS was the poster boy, it is also the responsibility of the CFO and executive team. The finance team should be held accountable.
Was the RBI too harsh?
Because customer protection and financial stability are paramount for the central bank, it has taken very strong actions in the past. Yes Bank, RBL Bank, HDFC Bank, Mastercard, Amex, Razorpay, etc, are examples. Overnight, RBI made Vishwajit Ahuja former head of RBL Bank and Rana Kapoor former head of Yes Bank, leave the banks. But in the Paytm case, the RBI took a different path.
But what if RBI had reacted differently? What if RBI invited the senior management, board of directors and independent directors of Paytm and made them aware of the action? Maybe they would understand the gravity.
Specifically, when RBI says that they have many tools to deal with such incidents, the thought that comes to my mind is whether they could use other tools.
Remember, Paytm has 330 million wallet accounts, over 31 million merchants and lakhs of shareholders who lost trust and share value overnight. The direction of the RBI with 5 bullet points is just not enough for the world to understand the trigger. After the RBI’s action I spoke to more than 30 people and no one had any idea what exactly was going on. Imagine that this is the situation of the industry, what would be the situation of the customers and traders? The regulator simply cannot expect that every customer of PPBL has received their half-page direction. In the press conference, the RBI Governor said that they will release the Frequently Asked Questions. Ideally, they should have already released the FAQ and not left people guessing about the consequences.
In one of the conferences, Vijay Shekhar Sharma said that the RBI called him (when they were looking for applications from industry for payment banks) and asked him to apply for the license of the payment bank. Which shows that the RBI is really progressive and they wanted to guide emerging FinTechs. But I think for the new-age companies there should be a different treatment. We really need innovation in regulations as well. PPBL is not just one, but there could be many others. FinTechs have also traversed unconventional paths. Investors are looking for value, REs and their partners are looking for more business, while the government policies like MDR, and processes like UPI are restricting them from making money. Therefore, the only way for them to become profitable is to get more customers and borrow. It is also time for the RBI to review the entire payments banking segment as few of them have already surrendered their licenses and those who have the licenses are not making remarkable progress.
Therefore, I strongly believe that regulators need to use slightly different lenses and take a hand in regulating FinTechs. Because let’s not forget that they are the ones who started the innovation, otherwise we would still be standing in line outside the cashier at branches and ATMs to withdraw money.
At the same time, Paytm teaches us that to get a license, be it a Payment Bank, SFB, PPI or PA and become a regulated entity, only those who are very serious about it should be a part of it. As they say, it’s fun being a kid because when you grow up, then you have to behave like an adult and the world will treat you that way too.
The badge of a regulated entity comes with great responsibility. And since RBI has vocally blamed and penalized PPBL for compliance, it certainly puts Paytm in the spotlight. Because if tomorrow the license of PPBL is canceled it is not only sad news for PPBL but also RBI.
Well, We at ETBFSI have been covering the paytm story with updates from time to time, Click here if you want to stay updated.
This week, RBI kept the repo rates on hold and also announced major initiatives on CBDC and AEPS systems. Click here to read our coverage of RBI MPC announcement.
As always, I am adding here the top five stories of the week, trust that you will find them meaningful.
1) CASA deposit is bigger for private banks than PSBs
2) Unlocking Paytm’s wallet of woes: How the crisis may play out for India’s largest fintech firm
3) How will Irdai’s AYUSH inclusion directive play out for insurers
4) Paytm crisis: RBI action may hit IPO plans of fintech firms
5) Fully embracing ’embedded’ model: PNB MetLife CDO on new branches and digital tools
Happy Reading
Amol Dethe,
Editor,
ETBFSI.