Regulatory Directive Deals

The post-Covid era led to stark changes in every individual’s work-life balance. While adapting to the ‘new normal’, trends like remote work, digital

The RBI has imposed additional restrictions on Paytm Payments Bank (PPB), which will no longer accept fresh deposits in any Customer Accounts, Prepaid Accounts, Wallets, or FASTags after February 29, 2024. This action was taken under Section 35A of the Banking Regulation Act of 1949. The RBI cited persistent non-compliance identified by external auditors and significant supervisory concerns within PPB as reasons for its decision.

Under the Banking Regulation Act of 1949, the RBI holds broad powers to issue directives in the public interest of banking policy. The introduction of specialized banks, such as Payment Banks, was recommended by the Nachiket Mor committee with the aim of promoting financial inclusion. These banks are required to register as public limited companies and obtain licenses under the Banking Regulation Act, 1949. While Payment Banks can conduct most banking operations, they are restricted from advancing loans or issuing credit cards. They can, however, accept deposits up to 2 lakhs and provide mobile and internet banking services.

The Reserve Bank of India (RBI) is the central banking institution in India responsible for regulating the country’s financial system and currency. It formulates and implements monetary policies to maintain price stability and ensure the growth of the Indian economy.

Paytm is a prominent Indian digital payment and financial services company. It offers a wide range of services including digital payments, banking, lending, insurance, and wealth management through its mobile app. Paytm has played a significant role in promoting digital transactions and financial inclusion in India.

In recent years, there have been various developments and collaborations between RBI and Paytm. As a regulated financial institution, Paytm operates under the guidelines and regulations set forth by the RBI. The RBI periodically issues directives and guidelines related to digital payments and financial services, and Paytm complies with these regulations to ensure the safety and security of its services.

Additionally, Paytm has worked closely with the RBI to promote financial literacy, expand digital payment infrastructure, and drive financial inclusion initiatives across India. The collaboration between RBI and Paytm is crucial for fostering a robust and inclusive financial ecosystem in the country.

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. 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.

It’s interesting to note 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.

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 especially post the demoentization which was conducted on November 8th, 2016 under then RBI Governor Urjit Patel.

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