Explained: How RBI ban on Paytm impacts you and your finances from 1 March

The fintech company has been barred from accepting fresh deposits and carrying out credit transactions for consistently flouting RBI guidelines

Starting from February 29, Paytm Payments Bank won't be able to accept new users. If you're not already using Paytm, you can't create a new account after this date. Existing users won't be able to use Paytm wallets, Fastags, or Mobility Cards after this date. This is because the Reserve Bank of India has barred the listed fintech’s payment bank from offering banking services after February. The action against One 97 Communications, the parent company that runs Paytm, is due to “non-compliance and continued material supervisory concerns in the bank,” RBI said.

Paytm Payments Bank Ltd (PPBL) is an associate company of PAYTM and has over 100 million KYC customers. It also has 300 million wallet users, 30 million bank account holders and a 17 per cent market share in FASTag by value.While the regulator had earlier banned new customer on-boarding at PPBL, the latest actions prohibit Paytm from undertaking any credit or deposit transaction after 29 February, 2024.

 

The central bank has frozen all basic transaction services through Paytm Payments Bank’s various platforms using Unified Payments Interface (UPI), IMPS, Aadhaar-enabled payments, and others, effective February 29.

The regulator has banned Paytm from providing other banking services such as transfer of funds, Aadhaar Enabled Payment System, Immediate Payment Service, Bharat Bill Payment Operating Unit, and the UPI facility. Moreover, no further deposits or credit transactions or top-ups will be allowed in customer accounts, prepaid instruments, wallets, FASTags, National Common Mobility Card cards, etc, after February 29, other than any interest, cashback, or refunds that may be credited any time.

Mobility Cards work for various payments like shopping, parking, ATM withdrawals, metro and bus rides, fuel, and food bills.

According to the announcement, customers can freely withdraw funds without any limitations. Although you won't be able to receive or send money from your account, you can still access and withdraw the remaining balance in your Paytm account.

"RBI’s present directions to PPBL essentially means a stop to PPBL’s core and popular services like Paytm Wallet, Paytm UPI, and Bill Payment Services (for Mobiles, Electricity, DTH) etc. with effect from 29.02.2024 and PPBL will only be able to provide merchant services on its app from 01.03.2024," said Priya Dhankhar, Senior Associate, SKV law offices

This RBI move will effectively force  account holders to liquidate their balance and shut accounts.

Merchants will also be forced to  move out of Paytm and opt for other UPI players.

Impact in a nutshell:

"For customers, services will be normal till February 29 and after that, they will not be able to make deposits or credit transactions or top-ups on their accounts, prepaid instruments, wallets, FASTags, NCMC cards, etc. After February 29, once the restrictions kick in, users will be able to withdraw and use their money in their accounts, FASTag service, etc. up to the balance available in their bank accounts," said Mehak Khanna, partner, Khaitan and Khaitan.

Can I still use Paytm UPI?

If you use the Paytm application for UPI and wallet payments, where the underlying bank account might be with a different bank, you should be able to operate normally, but if you are using the bank account, you will have to stop doing so from February 29. 

Since the RBI action is againse the banking operations of Paytm, it means customers can use Paytm as a digital payment option as long as their bank account is linked to an external bank. 

What will happen if your Paytm app is linked to your bank account with the payments bank?

There are no restrictions on usage of the app to transfer money or withdraw it from the wallet or account. Acount holders can freely transfer money out of the wallet and bank accounts but cannot receive money from 1 March

What to do if you use Paytm Fastag or its National Common Mobility Card?

RBI has allowed customers to extinguish their balances but they cannot load these instruments with more money from 1 March, 2024.

Is there a need to panic? 

"Firstly, don’t panic; the RBI protects depositor money; we have seen this in the past if you have money there. You may have nothing to worry about as the apex bank will safeguard that. However, stay updated with the latest information and notifications by the RBI. Keep an eye on announcements and communication. Check the status of your account and understand any restrictions or changes imposed. Be aware of the specific services that might be affected. You may also reach out to the customer support team of the platform to seek clarification on any doubts or concerns. They can guide the impact of the regulatory actions on your account," saif Adhil Shetty, CEO of Bankbazaar.com

Earlier, the RBI in its previous press release dated 11th March 2022 directed PPBL to stop onboarding new customers. The regulator has now adopted a stricter stance, citing continued non-compliance and persistent material supervisory concerns. Accordingly, the RBI on 31 Jan 2024 imposed stricter measures, thereby significantly limiting the scope of business activities for PPBL.

The regulator used a legal provision that allows it to act in the interest of depositors, and did not specify a timeline for reviewing the restrictions imposed on the bank.

"For all practical purposes, the above notifications end the operations of Paytm Payments Bank," Bernstein said in a note on Wednesday evening. "This is a definite negative development and adds to the already heavy regulatory overhang on the business," Bernstein analysts said.

The regulator has also asked PPBL to terminate the Nodal accounts of One97 Communications Ltd and Paytm Payments Services Ltd. at the earliest, or by 29 February 2024. Further, it has clarified that the settlement of all pipeline transactions and nodal accounts shall be completed by 15 March 2024 and no further transactions shall be permitted thereafter.

While the regulator had earlier banned new customer on-boarding at PPBL, the latest actions prohibit Paytm from undertaking any credit or deposit transaction after 29 February, 2024.

"Paytm has recently announced its plan to downsize its BNPL operations and was working to mitigate the impact by scaling up higher-ticket Personal and Merchant loans. Against this backdrop, the latest measures raise serious concerns over its business outlook and dent overall investor confidence. We, thus, remain watchful of PAYTM’s business model and its ability to navigate through this highly uncertain regulatory and macro environment," said brokerage Motilal Oswal in a  note. 

Where does the RBI ban stem from?

" The RBI's recent imposition of major business restrictions on Paytm Payments Bank stems from persistent non-compliances and supervisory concerns uncovered in comprehensive audits. This regulatory action underscores the imperative for financial institutions to adhere to compliance standards, safeguard consumer interests, and maintain the integrity of the banking system. By restricting new customer onboarding and transactions, the RBI aims to address identified issues and uphold the credibility of the banking sector," Rajesh Rai, Managing Partner, RR Legal Partners LLP.

The repercussions may include reputational challenges for Paytm, heightened scrutiny on regulatory adherence, and potential implications for customer confidence. This development highlights the critical need for robust governance and regulatory compliance within the financial industry.