RBI action against Paytm

What’s in today’s article?

• Why in news?
• What is Payments Bank?
• News Summary: RBI action against Paytm
• What does the RBI direction say?
• Reasons behind this action

Why in news?

• The Reserve Bank of India barred Paytm Payments Bank Ltd from accepting fresh deposits and making credit transactions from March 2024.
• This decision essentially bars Paytm Payments Bank from offering all its core services — including accounts and wallets.
• While the action is technically not a cancellation of Paytm Payments Bank’s licence, it practically constricts the company’s operations to a great extent.

Payments Bank

• Background
  • Based on the recommendations of the Nachiket Mor Committee, Payments Bank was set up by RBI in 2014.
  • It was set up to operate on a smaller scale with minimal credit risk.
• Objectives
  • The main objective is to advance financial inclusion by offering banking and financial services to the unbanked and under-banked areas.
  • It was set up to help the migrant labour force, low-income households, small entrepreneurs etc.
• Payments bank in India
  • India currently has 6 Payment Banks namely:
    • Airtel Payment Bank, India Post Payment Bank, Fino, Paytm Payment Bank, NSDL Payment Bank and Jio Payment Bank.
• Features
  • They are differentiated and not universal banks.
  • These operate on a smaller scale.
  • It needs to have a minimum paid-up capital of Rs. 100,00,00,000.
  • Minimum initial contribution of the promoter to the Payment Bank to the paid-up equity capital shall at least be 40% for the first five years from the commencement of its business.
• Activities that can be performed by the Payment Banks
  • A payments bank is a financial services company that cannot accept more than ₹2 lakh in deposits per account.
  • It is not allowed to lend directly but can sell loan products.
  • It can promote other third-party loan products.
  • Payments banks are be permitted to make personal payments and receive cross border remittances on the current accounts.
  • It can issue debit cards.

News Summary: RBI action against Paytm

• RBI has asked Paytm Payments Bank to stop accepting money in any customer account, including wallets and other prepaid instruments such as FASTags, or any other instrument from March 1.
• RBI attributed its action to persistent non-compliance and continued material supervisory concerns warranting further supervisory action.

What does the RBI direction say?

• Barred Paytm Payments Bank from offering practically all of its key services
  • Paytm cannot accept deposits or top-ups in any customer account, prepaid instruments, wallets, FASTags, National Common Mobility Card (NCMC), etc. after February 29.
• Account to be terminated
  • RBI said that nodal accounts of parent company One97 Communications and Paytm Payments Services should be terminated at the earliest, and not later than February 29.
• Settlement of all pipeline transactions and nodal accounts
  • Settlement of all pipeline transactions and nodal accounts—in respect of all transactions initiated on or before February 29—should be completed by March 15, and no transactions shall be permitted thereafter.
• Customers are allowed to withdraw or use the money
  • Customers can withdraw or use the money from their Paytm accounts, including savings and current accounts, prepaid instruments, FASTags, NCMC, etc., freely as long as they don't exceed their available balance.

Reasons behind this action

• Paytm Payments Bank has been facing RBI scrutiny since 2018.
• While the central bank did not specify the exact reasons for the latest action against Paytm, experts believe it could be due to the RBI’s concerns on KYC compliance and IT-related issues.
• The central bank is against allowing any institution or banking entity to expose depositors’ money to such risks.
• It has been discovered that Paytm Payments Bank and its parent company, One97 Communications, were investigated by the RBI because they didnot have enough barriers to protect information within the group.
• Additionally, China-based entities, which indirectly owned a stake in the parent company, had access to data, which raised concerns.

Q1) What is Paytm?

Paytm is a financial technology company that specializes in digital payments and financial services. It is India's largest mobile e-commerce website and is trusted by more than 45 crore Indians. 

Q2) What is Nachiket Mor Committee?

The Nachiket Mor Committee, also known as the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, was formed in 2013 by Raghuram Rajan, the governor of the Reserve Bank of India (RBI). The committee's final report was submitted in 2014.

Source: RBI action against Paytm: probable causes, effects, and what happens to your money | Hindustan Times | Clear Tax | Times of India