Has Paytm Woken Up Too Late?

Has Vijay Shekhar Sharma given up on the bank?
For now, he seems to be on a save-OCL mission. The bank will face its logical end, observes Tamal Bandopadhyay.

However brilliant he may be in academics, if a student doesn't care about school norms and bunks classes to play cricket or watch films, he is punished.

If he does this too often, despite being repeatedly reprimanded by the principal, the school typically rusticates him since it cannot afford to compromise on discipline.

The student's parents then rush to the school to appeal. They also approach those who might be able to influence the principal to revoke the order, and even go to great lengths to explain to the neighbours what has gone wrong and how the boy would be disciplined.

But what happens when a payments bank plays truant?

Well, when a payments bank is being punished for 'persistent' non-compliance with regulations, nowhere are its managing director and CEO to be seen.

Instead, its majority stakeholder has taken up the responsibility of doing everything -- convincing customers to stay put, the regulator to go slow and even the finance minister to influence the regulator.

I am talking about Paytm Payments Bank Ltd (PPBL) -- 'India's most sincere bank" (as it describes itself).

The objective of setting up such a bank is financial inclusion -- to provide small savings accounts and payments/remittance services to migrant labourers, low-income households, small businesses, and other unorganised sector entities.

The bank can accept current and savings accounts (up to Rs 1 lakh initially; the amount was doubled in April 2021); issue ATM and debit cards (not credit cards), payment and remittance services; be a business correspondent for other banks; and distribute financial products such as mutual funds and insurance policies.

With the Reserve Bank of India's approval, PPBL has also been operating as a Bharat Bill Payment Operating Unit, which can facilitate bill payment services for utilities such as electricity, phone, gas and water, as also for loans, FASTag recharge, credit card bills, education fees and municipal taxes.

On January 31, the RBI directed PPBL to stop operations by February 29. All pipeline transactions must be settled by March 15.

The news came as a shock, and took the steam out of the Interim Budget presented the next day. It also grabbed half of the one hour that RBI Governor Shaktikanta Das spent with the media after the latest monetary policy meeting on February 8.

That's natural, if we look at the bank's standing in India's payments architecture. It has more than 350 million wallet users, 30 million bank accounts and at least eight million Fastags, and is instrumental for 1.6 billion UPI transactions a month. The bank has at least 700,000 point-of-sale customers and around 323 million debit cards.

Incidentally, just a day before the RBI's action, the Indian Highways Management Co Ltd barred PPBL from issuing fresh FASTags after an audit found it was not complying with the parameters prescribed in the service-level agreement.

The action followed a show-cause notice issued to the bank (on why it should not face penalties for non-compliance) by the National Highway Authority of India's arm that deals with electronic toll-related matters.

Incorporated on August 22, 2016, PPBL received the RBI licence on January 3, 2017 and commenced operations on May 23, 2017. Vijay Shekhar Sharma, a part-time chairman of the bank, owns 51 per cent stake, and One97 Communications Ltd (OCL) owns 49 per cent. OCL, a Noida-headquartered listed Indian multinational technology company, was set up by Sharma in 2000.

Issues of non-compliance by PPBL are not new.

• On June 20, 2019, the RBI curbed PPBL from enrolling new customers after an audit made certain observations about the process it followed to acquire new customers and its adherence to know-your-customer (KYC) norms. (The curb was lifted in October 2019, after an undertaking by the bank.)
• On October 1, 2021, the RBI imposed a Rs 1 crore penalty on it for deficiencies in regulatory compliance (it had reportedly submitted information that did not reflect the factual position).
• On March 11, 2022, the RBI directed PPBL to stop, with immediate effect, on-boarding new customers. It was also directed to appoint an audit firm to conduct a comprehensive system audit of its IT system. The action was based on certain supervisory concerns.
• On November 25, 2022, the RBI returned the application of Paytm Payments Services Ltd seeking to continue as an online payment aggregator. (On March 27, 2023, the OCL subsidiary said it received an extension from the RBI to resubmit its application for online payment aggregator licence. In the meantime, it would continue with the service.)
• On October 10, 2023, the RBI slapped a Rs 5.39 crore penalty on PPBL for non-compliance with certain provisions of its KYC and licensing guidelines in relation to 'enhancement of maximum balance at end of the day', 'cybersecurity framework' and 'securing mobile banking applications, including the UPI ecosystem'.

The January 31 action by the regulator is a climax of the sequence of events. The RBI had held discussions with those associated with the bank at different levels, including its board, before taking the action.

Serious irregularities have been found with respect to the KYC norms and how much money a payments bank can keep as day-end balance in a customer account. Besides, the RBI has found several instances of a single PAN linked to thousands of customers for transactions worth crores of rupees.

This even raises concerns of money laundering as an unusually high number of dormant accounts are prone to be used as mule accounts. On many occasions, PPBL has allegedly submitted false compliance reports, fooling the regulator.

Finally, it has not stayed at an arm's length with the promoter group entities and got involved in significant intra-group and related-party transactions, which have reportedly not been disclosed.

Who knows if bank customer data was shared with the group companies?

The RBI has acted against the bank under Section 35A of the Banking Regulation Act, 1949. The March 15 deadline is as good as the end of a moratorium. What will happen after that? Theoretically, the bank's board can be superseded and it can even go for liquidation.

The Paytm wallet is a different thing -- it can survive and be passed on to another entity, with the RBI's approval. Let's not speculate on these.

Could this have been avoided?

• The mobile-based prepaid instrument, m-wallet, known as Paytm, was an OCL product. It was transferred to the payments bank on July 25, 2017 as the RBI didn't allow OCL to continue with it.
  Many argue that if BharatPe, PhonePe and Google Pay et al are allowed to run such wallets, why wasn't OCL allowed to do so? The regulator's logic could be since the company had promoted a bank, why duplicate the business?
  But the Paytm wallet brand overshadows everything. Could this be the root of all problems?
• The other issue is related to licensing norms. Unlike universal banks and small finance banks, which have restrictions on how much stake one can own with a glide path of bringing down the promoters' stake over the years, there is no such curb for the promoters of payments banks. Could this have given Sharma the confidence to run the show his way?
• The quality of senior management was not the bank's pride till it got a new CEO, chief risk officer and chief compliance officer from reputable banks. New members have also been inducted to the board where all independent directors were exactly not independent.
  Sharma, some say, has been planning to step down as part-time chairman.
• Finally, the OCL listing in November 2021 had its role in the saga. Much of the overdoing in terms of acquisition of wallet customers seemed to have happened in the run-up to the listing of the largest initial public offer in India's corporate history to create the right noise in the market.

Two types of transactions are done through the wallet -- P2P (person to person) and P2M (person to merchant). A diluted KYC norm was followed for people involved in P2P transactions, but many of these transactions turned out to be P2M transactions. They have overshot the limit many times.

Ideally, the bank should have filed suspicious transaction reports to the financial intelligence unit, which collects financial intelligence about offences under the Prevention of Money Laundering Act.

Has Sharma woken up too late? Will the OCL advisory panel be able to save the bank? No comment, for now. My limited observation is: The three-member panel has been set up to strengthen the corporate governance within OCL. What happens to the payments bank? What are its board and MD and CEO Surinder Chawla doing?

There is no sign of the guardian of the truant schoolboy as yet!

Has Sharma given up on the bank? For now, he seems to be on a save-OCL mission. The bank will face its logical end.

Tamal Bandyopadhyay, author of Roller Coaster: An Affair with Banking, is a senior advisor to the Jana Small Finance Bank Ltd.