RBI bans Paytm Bank from onboarding new customers

Paytm Payments Bank joins a growing list of companies such as MasterCard, Diners Club, American Express and HDFC Bank which have been penalised for being weak links in the system for non compliance as the regulator wants to build a bullet proof payments system in a country where digital adoption is growing by leaps and bounds.

Paytm Payments Bank has been directed to appoint an IT audit firm to conduct a comprehensive system audit of its IT system, RBI said in a short press release on its website.

“Onboarding of new customers by Paytm Payments Bank Ltd will be subject to specific permission to be granted by RBI after reviewing report of the IT auditors. This action is based on certain material supervisory concerns observed in the bank,” the RBI said.

A response from Paytm was awaited.

Paytm Payments Bank is a joint venture between Paytm founder Vijay Shekhar Sharma and the listed holding company One97 Communications, the parent of PayTm. Sharma owns 51% in the bank in his personal capacity.

It started operations in 2017 and claims to have 60 million bank accounts with 4 lakh users added every month, according to its website. It is also one of the largest issuers of the FASTag system for toll payments at highways with over 8 million FASTag units issued so far.

This is the second time that RBI has been banned from opening new accounts or onboarding new users. In June 2018, RBI had made certain reservations about the process the company was following to acquire new users, with relation to know-your-customer (KYC) norms.

In a reply to a RTI query, RBI had said that Paytm was in violation of the KYC rules, which led to its ban. In addition to this, RBI’s reply to the RTI also mentioned that Paytm failed to maintain the violated the end-of-the-day Rs 100,000 limit per account.

RBI’s latest action comes as a big blow to Paytm’s plans of converting into a small-finance bank. Paytm was looking to apply for the small-finance bank license in August this year. In the past it has laid down its aspirations to the RBI of converting into an SFB, and had multiple discussions with the central bank on the matter.

The RBI action is yet another example of the regulator’s tough stance against any compliance, regulatory or technology linked violations. Paytm Payments Bank joins a list of large local and multinational banks and payment companies that have faced the RBI wrat.

in December 2020 it had stopped, HDFC Bank the largest issuer of credit cards in the country, from issuing new cards and introducing new digital products after multiple glitches linked to digital banking, cards and payments on the bank’s platform were reported in the past two years. The ban was lifted in August 2021.

In April 2021 the central bank had banned the US-based card company Diners Club from onboarding new domestic customers onto its card network for violating data storage norms. That ban was lifted in November 2021 after Diners Club complied with the stipulated norms. American Express which was also banned along with Diners Club continues to face restrictions.

Later in July 2021, RBI had also placed Mastercard under restrictions for non-compliance with its local data storage norms. That ban has also not lifted.

Banking consultant and RBI watcher Ashvin Parekh said the central bank’s action shows that non compliance has its consequences.

“World over central banks have become tough on compliance and the RBI is no different. The actions against the entities are because of different reasons like HDFC Bank was due to service deficiences and digital outages while that on Mastercard was due to data storage issues. These things take time to resolve and even in this case Paytm will have to conduct and audit and put course correction into action,” Parekh said.

Paytm Payments Bank is one among six payments banks which are in operations out of the 10 licenses the RBI issued in 2015. Subsequently, RBI allowed payment banks to convert into small finance bank opening lending possibilities for these lenders.

The RBI action is a result of a series of compliance and regulatory issues with Paytm. These include KYC compliance and also IT related issues,” a person familiar with the RBI action told ET. “The central bank is very clear that it cannot allow depositors’ money to be exposed to such risks. This action comes after many rounds of communications to Paytm, and it has been taken to pinch them hard so that they comply.”