RBI bans Paytm Payments Bank

RBI bans Paytm Payments Bank

GS-III: Indian Economy

(UPSC/State PSC)

Important for Prelims:

Paytm Payments Bank, Reserve Bank of India, Payment Bank, Fund transfer services like AEPS, IMPS, BBPOU and UPI facility etc.

Important for Mains:

About Paytm Payments Bank (PPBL), Functions of Payment Bank, Reasons for Restriction by RBI.

03 February, 2024

Why in News:

Recently, Reserve Bank of India has banned Paytm Payments Bank due to concerns regarding violations of regulatory norms and non-compliance.

  • Paytm Payments Bank will not be allowed to accept deposits or conduct credit transactions.
  • This ban will become effective from March 2024.

Services restricted by RBI:

  • This action of RBI has restricted the operations of the company to a large extent.
  • Paytm Payments Bank has been barred from providing key services like accepting deposits or top-ups to any customer account, prepaid devices, wallets, Fastag, National Common Mobility Card etc. after February 29.
  • Banking Services: Fund transfer services like AEPS, IMPS etc. BBPOU and UPI facility will have to be stopped.
  • The nodal accounts of parent company One97 Communications and Paytm Payments Services should be terminated.
  • This action of RBI does not cancel the license of Paytm Payments Bank.

Reasons for restriction by RBI:

  • Audit Report: The comprehensive system audit report and compliance verification report of the external auditors revealed that “persistent non-compliance and continuing material supervisory concerns remain prevalent in the Bank.”
  • Violation of RBI directive: RBI had earlier directed PPBL to stop onboarding new customers with immediate effect, but the bank sidestepped the directive to onboard customers through offline mode.
  • Data security: lack of required information barriers within the group and established access to data by China-based entities that were indirect shareholders in the payments bank through their stake in the parent company.
  • Violation of Payments Bank Terms: Paytm Payments Bank had reportedly failed to meet the net worth criteria of Rs 100 crore and had exceeded the Rs 1 lakh deposit limit per account permitted for payments banks at that time.

Impact of restrictions on customers:

  • Given Paytm's significant customer base, RBI's action could impact a large number of customers.
  • RBI has allowed PPBL customers to withdraw or utilize their balance without any restrictions.

Permitted Services:

  • Will continue to acquire services for merchants in partnership with many of the leading banks in the country and expand third party bank partnerships.
  • Paytm Payment Gateway business (online merchants) will continue to provide payment solutions to its existing merchants.
  • Offline merchant payment network features like Paytm QR, Paytm Soundbox, Paytm Card Machine will continue as usual, where it can also onboard new offline merchants.

RBI's Instructins:

  • The regulator had directed Paytm Payments Bank in March 2022 to stop onboarding new customers and appoint an IT audit firm to conduct a comprehensive system audit.
  • RBI has imposed the ban under Section 35A of the Banking Regulation Act, 1949.
  • The minimum paid-up capital for a payments bank is set at Rs 100 crore.
  • It is mandatory for these banks to keep 75% deposits in government bonds and 25% in other banks.
  • Demand deposits accepted are up to INR 200,000 per individual customer.

About Paytm Payments Bank (PPBL):

  • Launched in November 2017, it is an Indian payments bank.
  • In the year 2021, the bank received the status of scheduled bank from RBI.
  • Its headquarters is in Noida.
  • It is part of mobile payments company Paytm.
  • The parent company of Paytm Payments Bank is One97 Communications.
  • Vijay Shekhar Sharma holds 51 percent stake in it and One97 Communications holds 49 percent stake.
  • Vijay Shekhar Sharma is the promoter of Paytm Payments Bank.
  • The founder and chairman of Paytm is Vijay Shekhar Sharma.
  • Paytm Payments Bank has over 100 million ‘Know Your Customer’ (KYC) verified customers.
  • It is also the largest issuer of FASTag with over 8 million FASTag units issued.

About Payment Bank:

  • Payment banks are a special type of banks, which are permitted to carry out certain limited banking activities.
  • Payment bank comes under the category of differentiated bank licensed banks.
  • Two types of licenses are issued by the Reserve Bank of India to start banks: universal bank license and differentiated bank license.
  • Reserve Bank of India had given approval to 11 payment banks on August 19, 2015.
  • RBI has made it mandatory for payment banks to have a minimum paid-up equity capital of Rs 100 crore.

Objective:

  • To provide small savings accounts and provide services to migrant workers, low income earning households, small businesses, other institutions in the unorganized sector and other users.
  • Promoting financial inclusion.

Functions of Payment Bank:

  • It can issue ATM/Debit cards.
  • It cannot issue credit cards.
  • Cannot accept NRI deposits.
  • A payments bank can act as a business correspondent of another bank. It may also deal with distribution of mutual fund units and insurance products.
  • Payment banks can take deposits from customers, but cannot give loans.
  • There are also instructions that the operations of these banks will be completely digital from the beginning.

Recommendation:

  • The launch of these banks was recommended by the Nachiket Mor Committee.
  • These banks are registered as a public limited company under the Companies Act, 2013.

Governing:

  • These banks are governed by the Banking Regulation Act, 1949; RBI Act, 1934, Foreign Exchange Management Act, 1999 and the Payment and Settlement Systems Act, 2007.
  • Currently the number of payment banks is 6: Airtel Payment Bank, India Post Payment Bank, Fino Payment Bank, Paytm Payment Bank, NSDL Payment Bank, Jio Payment Bank.

About Reserve Bank of India (RBI):

  • The Reserve Bank of India was established on April 1, 1935 as a private bank in accordance with the provisions of the Reserve Bank of India Act, 1934.
  • Its central office was initially established in Kolkata.
  • In the year, 1937 the central office was permanently shifted to Mumbai.
  • It was nationalized in the year 1949.

Source: The Indian Express

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Mains Question

Discuss the reasons for the ban imposed by RBI on Paytm Payments Bank and the guidelines of RBI.