What RBI Order Means For Paytm And Its Users

The Reserve Bank of India has ordered Paytm Payments Bank to stop its popular mobile wallet business along with other activities.

What RBI Order Means For Paytm And Its Users

The order is a major setback for Paytm founder Vijay Shekhar Sharma

Indian regulators ordered the parent of digital-payments provider Paytm to halt a bulk of its business, dealing a severe blow to a high-profile tech pioneer that grappled for years with regulators and criticism around its Chinese backing.

The Reserve Bank of India on Wednesday ordered Paytm Payments Bank Ltd. to stop its popular mobile wallet business along with other activities, citing persistent non-compliance and supervisory concerns.

The abrupt action suggests regulators have grown dissatisfied with the fintech pioneer and raises the prospect of more action down the road.

The order is a major setback for charismatic founder Vijay Shekhar Sharma, just as he's trying to convince investors Paytm can reverse years of losses to become sustainably profitable. The ruling could directly and indirectly slash more than half of its earnings, Jefferies analysts estimated.

The order "significantly hampers Paytm's ability to retain customers in its ecosystem, and accordingly restricts it from selling payment products and loan products," Macquarie analysts including Suresh Ganapathy said in a note. "Revenue and profitability implications in the medium to long term could be significant."

The regulator said the bank arm, which processes transactions for the giant payments brand Paytm, must stop its banking activities after February 29. Existing customers, however, can withdraw their funds and use up the balance in the prepaid cards or wallets without any restrictions, the RBI said.

The order could directly reduce Paytm's earnings before interest, taxes, depreciation and amortization by as much as 30% and indirectly by as my much as 25% because of impact to its reputation, Jefferies analysts said in a note. Jefferies cut its price target for Paytm shares to 500 rupees from 1,050 rupees.

SoftBank Group Corp.-backed Paytm, whose official name is One97 Communications Ltd., went public to much fanfare in late 2021 after Sharma built the company to make it easier for consumers to make payments and transfer money. Still, its stock has slumped more than 60% since as investors questioned its profit-making ability and it tussled with regulators.

The latest order comes nearly two years after the regulator barred the bank from taking on new customers because it violated certain rules, Bloomberg News had reported. Sharma had then said the bank is fully compliant with Indian rules.

The RBI had asked the bank, which operates under a restricted license that doesn't allow it to lend but accept deposits of as much as 200,000 rupees ($2,408) per account, to stop onboarding customers pending an audit of its information technology system.

Paytm had also come under fire for its backing from Ant Group Co., the fintech leader founded by Jack Ma, particularly as domestic sentiment soured rapidly on Chinese firms. Last year, Sharma orchestrated a deal under which he acquired Paytm shares from Ant in return for convertibles, effectively diminishing the Chinese firm's influence and control.

The latest order worsens the bank's woes with the regulator making scathing observations about its business.

"The comprehensive system audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action," the RBI said in a statement on its website.

The RBI said the bank won't be allowed to take any further deposits or conduct credit transactions or carry out top-ups on any customer accounts, prepaid instruments, wallets, cards for paying road tolls after Feb 29. Also, special purpose accounts of parent firm One97 Communications and Paytm Payments Services Ltd. used to make settlements are to be terminated no later than Feb. 29, the RBI said.

In a response, Paytm said it was taking urgent steps to comply with the RBI's order and was working with the banking regulator to assuage concerns as early as possible. Going forward, One97 won't work with Paytm Payments Bank, and will expand its financial and payments services through its partnerships with other banks, the company said in a filing to stock exchanges.

One97's other businesses such as loan and insurance distribution as well as equity broking, which are not related to the payments bank, will likely remain unaffected, it said.

The RBI has been taking forceful action in recent months to clamp down on risks in the financial sector, hitting affected stocks. At the end of last year, it barred lenders from investing in alternative investment funds that hold stakes in their borrowers to prevent an unstable build up of assets. Before that, it imposed stricter rules to stem the relentless rise in risky consumer loans.

RBI Governor Shaktikanta Das said last month that India's financial sector needs to remain more watchful on risk management. He said some banks and non-bank financial companies didn't have the bandwidth to manage a surge in loans approved by algorithm models used by the financial institutions. RBI will guard against any sense of complacency and is committed to safeguard trust in the Indian financial sector, according to Das.

A key impact of RBI's latest order can be on Paytm's lending business if partners limit business due to operational and governance risks, according to Jefferies and Macquarie analysts.

"The bigger issue is Paytm has not been on the good books of the regulator and going forward, their lending partners also could possibly re-look at the relationships," the Macquarie analysts wrote.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)