The Reserve Bank of India’s restrictions on listed fintech company Paytm unfold a story of regulations, temporary respite and anticipation.

The recent development in the Paytm Payments clampdown is Paytm’s partnership with Axis Bank for its nodal account, to settle merchant payments which has resulted in gains of upto 5 per cent for the second straight session on February 19. 

The RBI's recent action has restrained PPBL from accepting new deposits after March 15, and the regulatory body stands firm on its decision.   

The saga has also evoked reactions from ministers, along with users, since the action will directly affect about 20 million merchants and digital payments in the country.

 Minister of State for Electronics and Information Technology Rajeev Chandrasekhar said the PPBL situation is a stark reminder that regulatory adherence cannot be dismissed by entrepreneurs, no matter how ambitious or dynamic they are.

Highlighting the specific case of Paytm founder Vijay Shekhar Sharma, the MoS IT told PTI the case was an instance of a zealous entrepreneur overlooking the imperative of regulatory compliance. 

Trade body Confederation of All India Traders (CAIT) had advised merchants to move to other fintech players, while maintaining that there is no impact on the future of digital payments in India.  

What was RBI’s action?

The Reserve Bank of India on January 31 imposed significant restrictions on Paytm Payments Bank, barring the payments arm of One97 Communications from accepting fresh deposits or top-ups from February 29, 2024.

The reason for the restrictions was due to ‘persistent non-compliance’ and continued material supervisory concerns, RBI said.

The central bank governor ruled out any review of the restrictions, which barred Paytm from accepting deposits and top-ups in prepaid instruments, wallets and FASTags among other services.

In 2022, RBI had halted the onboarding of customers on Paytm Payments Bank, with the reason for this action stemming from a discrepancy in linking PAN cards to the nodal accounts.

After the January 31 mandate by RBI, Paytm CEO Vijay Shekhar Sharma expressed confidence in overcoming challenges and building 

Stocks for the company plummeted upto 55 per cent, wiping out $2.5 billion from their market cap, after which they were put on an Additional Surveillance Measure due to volatility in stock.

Paytm Reacts

Paytm CEO Vijay Shekhar Sharma reassured users after the January 31 action that Paytm app will continue to function beyond the February 29 deadline, in an attempt to allay user concerns. He maintained optimism about India's position in global payment innovation and financial landscape. 

After the clampdown, Sharma also reportedly met Finance Minister Nirmala Sitharaman, with the company approaching top government officials to discuss the repercussions of the announcement. But the issue was ruled as regulatory.

Paytm roped in former chairman of the Securities and Exchange Board of India, Melveetil Damodaran for a three-member advisory committee that will ensure compliance and maintaining regulatory matters for the company, overseeing the board.

Other members in the committee include Mukund Mohan Chitale, former president of the Institute of Chartered Accountants of India as well as R Ramachandran, former chairman and managing director of Andhra Bank.

Experts Take

Milan Sharma, Founder and MD, 35North Ventures said the future of banking services relies on their ability to adapt to newer regulations and being compliant.

“The market is rapidly evolving. The newer payment and lending infrastructures have really transformed the Indian financial market. It is too soon to jump to conclusions. PPBL is under scrutiny, for the time being, it's just facing some restrictions. The license still stands valid," he said.

 All innovations are first met with early-stage hurdles, lower market adoptions, and some technical challenges, he added. 

According to Ravi Teja Gupta, Founder of Hyderabad-based VC firm Guptaji Invests said payments banks are not profitable business models, and the restriction will make it an asset-light model which focuses on its other fintech businesses and e-commerce.

“ Payments banks can't give loans and so can't generate much revenue, but can sell other banks' products.  Also, since payments banks are zero-balance accounts, they are not profitable. Paytm Payments Bank focussed on financial inclusion. While the ban on Paytm payments bank is negative for the company, it is making the company a much more asset-light model. This makes the company focus on all other fintech businesses and e-commerce,” he said.