Paytm Plummets as RBI Halts Payments Bank, Shaking Market Confidence

Paytm, an Indian digital payments firm, lost a fifth of its market value on Thursday after the central bank ordered its payment bank to suspend operations. This jeopardised the company's profitability and the app on which it relies.

India's Paytm Plunged 20% After RBI Halted Payments Bank Business

The Reserve Bank of India (RBI) ordered Paytm Payments Bank on Wednesday to halt taking new deposits in its accounts or popular digital wallets in March, increasing concerns about the company's core payments business, as per Reuters (via Yahoo).

According to a person familiar with the situation, the RBI's order could be the first step toward canceling the bank's license. According to the source, the move against Paytm Payments Bank stemmed from years of noncompliance with central bank requirements, including as customer due diligence, fund use, and technology infrastructure.

Paytm, one of India's top payment firms, and the RBI did not respond to requests for comment. Paytm's president and chief operating officer, Bhavesh Gupta, said in a teleconference with analysts after market hours on Thursday that the company aims to resume normal operations by March, "if not earlier."

He said the company has held negotiations with the RBI, which have been "positive. " Paytm's stock dropped to a six-week low of 609 rupees, wiping off almost $1.2 billion in value from the company, also known as One 97 Communications. The shares closed down 20%, its largest daily decrease since its debut in 2021.

The bank, which contains all of Paytm's 330 million wallet accounts, is critical to the company's app and wallet ecosystem, which might suffer if Paytm fails to recruit banking partners to replace its payments bank.

Paytm CEO Vijay Shekhar Sharma said on an analyst call that the RBI move was a "speed bump" and that the company was seeking to build partnerships with banks other than Paytm Payments Bank in response to the regulatory directive. According to Sharma, such collaborations with banks will be easy to implement.

What Happens Next For Paytm's Banking Arm After India Central Bank Clampdown?

The Reserve Bank of India (RBI) has ordered Paytm's payments bank subsidiary to stop taking new deposits in its accounts or popular wallets in March, dealing a severe blow to one of the country's largest payment providers, as per US News.

Paytm shares fell by a maximum of 20% on Thursday following the central bank's move, which, according to a person familiar with the case, might be a forerunner to the cancellation of its licence.

Paytm Payments Bank is a specialized banking organization that was granted a license in 2015, the year payment banks were introduced in India and began operations in November 2017.

Payments banks can accept small deposits of up to 200,000 Indian rupees ($2,400), but they are not permitted to lend. Deposits must be held in government securities or with other banks.

Paytm Payments Bank is 49% owned by Paytm, which is also known as One 97 Communications. Paytm CEO and founder Vijay Shekhar Sharma own the remaining 51%.

Paytm Payments Bank is a crucial banking partner for Paytm. For example, funds deposited into Paytm's popular digital wallets are stored by Paytm Payments Bank.

According to Macquarie Capital, the bank houses all of the parent's 330 million wallet accounts, which means that any money kept in them is deposited with the payment bank. Digital wallets, which allow clients to store money for modest retail payments, are widely used in India for day-to-day transactions.

The RBI announced on Wednesday that Paytm Payments Bank will be unable to accept deposits, provide credit services, or conduct financial transfers after February 29. While the payment bank does not lend directly, it does offer credit products through third-party providers.

India's central bank said it took the step due to "persistent non-compliance and continued material supervisory concerns in the bank" but did not elaborate.

Paytm Payments Bank was barred from accepting new customers in March 2022 owing to similar concerns, but it continued to conduct business with existing customers. It has now been told to close the majority of its enterprises this month.

Paytm stated that the company would take action promptly to comply with the RBI's instructions. It will stop functioning with Paytm Payments Bank and begin working just with other banks. It anticipates a worst-case impact of 3 to 5 billion rupees ($36 million) on its annual earnings before interest, tax, depreciation, and amortization (EBITDA).

According to Jefferies, Paytm's business impact will be mostly driven by reputation concerns emerging from governance or compliance, with the way to resolution being stronger regulatory compliance. The RBI order ends the Paytm Payments Bank's operations, a negative development adding to an already hefty regulatory cloud on Paytm's business, Macquarie analysts said.

Photo: Paytm, Public domain, via Wikimedia Commons