Page 30 - BANKING FINANCE MARCH 2024

ARTICLE

business that appears to have forgotten basic governance investors, as the company's performance has been
principles. This has caused concern among the millions of disappointing since it became publicly traded in November
Paytm users. 2023. This latest episode will only exacerbate their
frustrations.
PPBL, with 50 million account holders and is part of a group
that has 300 million wallets, has been facing a lot of Not a speed bump
problems with non-compliance and supervision. In March
Conflicts between regulators and the entities they regulate
2023, the banking regulator warned them not to onboard
are not uncommon. However, when such conflicts occur in
new customers but the management did not take any
the financial sector, they take on a different significance.
action to correct the situation. There were several warnings
Regulated entities in this sector have a crucial responsibility
about falsified compliances, irregularities in KYC norms, and to manage money for clients rather than for their benefit.
rules about related-party transactions but they were Any failure on their part can have a massive impact on the
ignored. As a result, the regulator had no choice but to bar
larger economy, as was seen in the US subprime loan crisis
PPBL from key operations. It will be a crippling blow to the that led to the 2008 meltdown.
bank. Additionally, they have been directed to terminate the
nodal accounts of the parent firm and Paytm Payment Regulators, on the other hand, have a vital responsibility to
Services.
ensure the safety and stability of the financial system.
Therefore, the recent clash between the RBI and PPBL,
About a quarter of all UPI transactions on Paytm are
which resulted in RBI imposing restrictions on several PPB
credited to a PPB account. However, the regulator has activities from 29 February, should be viewed as a roadblock
determined that there is no separation between Paytm and
rather than a minor "speed bump", as described by PPBL's
the bank. This means that money and data are flowing too founder, Vijay Shekhar Sharma. The conflict with PPB should
freely between the two entities, even when they shouldn't. be seen as a wake-up call for RBI to treat the "speed bump"
Paytm now faces a challenge in forming partnerships with as a significant obstacle and take immediate action on the
other banks for UPI transactions, which will require a holding company model.
significant shift in its business model. This will not be an easy
task, given that lending partnerships are built on trust. Few This episode focuses on the lenient policies adopted by
banks will be willing to partner with an entity that is currently
payment banks, small finance banks, and other fintech
under strict regulatory and government scrutiny.
payment gateways while onboarding new customers. These
companies often fail to adhere to the mandatory KYC checks,
The revenue secretary, Sanjay Malhotra, has stated that resulting in the creation of fake accounts using fake IDs. This
PPB will be investigated if there are any new allegations of trend seems to be widespread as these entities try to
fund siphoning. Global brokerages Jefferies and Macquarie
demonstrate higher customer additions.
are both concerned that these issues could cause Paytm's
lending partners to become nervous and limit their business To conclude, the RBI's directive to PPBL highlights serious
with the fintech. The situation is unfortunate for Paytm's
irregularities in the bank's controls and checks. It raises
concerns about similar lapses occurring in other fintech
service providers. Although it is important to encourage the
rapid increase in digitisation of payments, it should not result
in regulatory laxity.

Therefore, RBI has taken a good step in cracking the whip
on Paytm Payments Bank and should follow this up with
tighter surveillance of such entities. These service providers
have not been able to further financial inclusion through
lending, and also suffer from a lack of transparency. RBI
needs to review the fundamental question of whether there
is a place for payment banks in the financial system.

28 | 2024 | MARCH | BANKING FINANCE