RBI bars Paytm Payments Bank from acquiring customers, calls for IT audit

The Reserve Bank of India (RBI) has barred Paytm Payments Bank (Paytm PB) from onboarding new customers with immediate effect because of certain supervisory concerns.

Furthermore, the banking regulator has directed Paytm PB to appoint an IT audit firm for conducting a comprehensive system audit of its IT system. Paytm PB will need specific permission from the RBI to restart the onboarding of customers following a review of the audit.

The RBI said the action is based on certain material supervisory concerns observed in the bank, without divulging details. Vijay Shekhar Sharma, founder & CEO of Paytm, and One97 Communications together own Paytm Payments Bank, which has over 58 million account holders. Sharma is the chairman of Paytm Payments Bank; Satish Kumar Gupta is its managing director & chief executive officer.

The ban on customer acquisition shall cripple business growth for Paytm PB, which is targeting to add half a billion customers to its fold. The payments bank also has 300 million mobile wallets. According to a statement by Macquarie Research, the ban won’t have a substantial impact on Paytm.

“We would expect a significant impact on Paytm’s brand and customer loyalty going forward.  We believe the recent developments reduce Paytm’s chances of upgrading to a small finance bank license — for which it is eligible to apply in May 2022,” they said.  

According to norms, payment banks are not allowed to lend; their main business is remittances and utility payments. These entities are also allowed to open bank accounts and they can sell third-party products like insurance, mutual funds, and also loans of banks to their customers.

Earlier in October of 2021, the banking regulator had slapped a penalty of Rs 1 crore on Paytm Payments Bank. While examining Paytm PB’s application for the issue of final Certificate of Authorisation (CoA), the RBI found that the company had submitted information that did not reflect the factual position.

Paytm PB was one of the 11 entities that were granted a payments bank licence in August 2015 by the regulator. The lender started operations in May 2017. 

The banking regulator has been tough on banks and other financial services providers on technology-related issues. In December 2020, the RBI barred HDFC Bank — the country’s largest private sector bank — from issuing new credit cards and also its digital initiatives under the programme, Digital 2.0. While the ban on credit cards was lifted, the ban on digital expansion continues even after 13 months.