The recent directive from the Reserve Bank of India (RBI) against PayTM Payments Bank has sent shockwaves through the financial sector. The central bank’s order cites persistent non-compliance issues, raising questions about the future of the popular digital payment platform i.e., PayTM.
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Background of Non-compliances in PayTM Payments Bank noted by RBI
The RBI’s move is not a sudden one. It follows a series of warnings and penalties issued to PayTM Payments Bank, highlighting compliance issues earlier. The bank was fined 5.39 crores for breaches, including failure to adhere to KYC (Know Your Customer) norms and neglecting risk profiling of clients, essential for international standards.
In this context, RBI vide their Press Release Dated: March 11, 2022 directed PayTM Payment Bank to appoint an IT audit firm to conduct a comprehensive System Audit of its IT system. Onboarding of new customers by Paytm Payments Bank Ltd would be subject to specific permission to be granted by RBI after reviewing report of the IT auditors.
Today i.e., Jan 01, 2024, RBI issued another Press Release noting that the Comprehensive System Audit report and subsequent compliance validation report of the external auditors revealed “persistent non-compliances and continued material supervisory concerns in the bank”, warranting further supervisory action from RBI.
In this blogpost, let us understand the impact on PayTM users and on PayTM stock.
RBI action on PayTM Payments Bank
As per RBI’s Press Release Dated: Jan 31, 2024, PayTM Payments Bank shall comply to the following:
(i) No further deposits or credit transactions or top ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, NCMC cards (National Common Mobility Card), etc. after February 29, 2024, other than any interest, cashbacks, or refunds which may be credited anytime.
(ii) Withdrawal or utilisation of balances by its customers from their accounts including savings bank accounts, current accounts, prepaid instruments, FASTags, National Common Mobility Cards, etc. are to be permitted without any restrictions, upto their available balance.
(iii) No other banking services, other than those referred in (ii) above, like fund transfers (irrespective of name and nature of services like AEPS, IMPS, etc.), BBPOU (Bharat Bill Payment Operating Unit) and UPI facility should be provided by the bank after February 29, 2024.
(iv) The Nodal Accounts of One97 Communications Ltd and Paytm Payments Services Ltd. are to be terminated at the earliest, in any case not later than February 29, 2024.
(v) Settlement of all pipeline transactions and nodal accounts (in respect of all transactions initiated on or before February 29, 2024) shall be completed by March 15, 2024 and no further transactions shall be permitted thereafter.
RBI press Release Dated: Jan 31, 2024
Impact on PayTM Users
Paytm users may wonder about the implications of these directives on their day-to-day transactions. While regular transactions that aren’t linked to PayTM Payments Bank accounts may continue, the halt on deposit and credit transactions in PayTM accounts will directly affect users.
PayTM Payments Bank to cease all deposit, credit transactions, and top-ups in customer accounts after February 29. Customers are allowed to withdraw and utilize their balances up to the available amount, but no further banking services, irrespective of their nature, will be offered by PayTM Payments Bank.The termination of Nodal accounts and payment services suggests a comprehensive shutdown of accounts linked with PayTM Payments Bank.
The RBI’s directive does not spell an immediate disaster for PayTM customers. The PayTM app, owned by One 97 Communications Limited, will still be accessible, allowing users to continue transactions. Additionally, customers can add funds to their wallets and fast tags until February 29th, offering a brief window to ease into the upcoming changes.
The one-month grace period, allowing customers to add funds until the end of February, seems more like a concession to prevent panic withdrawals. It doesn’t change the fundamental challenge facing PayTM Payments Bank—addressing the persistent non-compliance issues that have prompted this severe regulatory response.
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Is it the end of PayTM Payments Bank
PayTM Payments Bank, which holds about 12% of the wallet market, is now faced with an uphill battle for survival. The company has been under regulatory supervision for over 22 months, with previous warnings and fines not leading to substantial improvements. The drastic action taken by the RBI leaves little room for optimism about the future trajectory of PayTM Payments Bank.
While the situation appears dire, it might not necessarily be the end for PTM Payments Bank. The company has the opportunity to address the compliance issues highlighted by the RBI. The ball is in PayTM’s court to rectify the identified loopholes, enhance their systems, and prove to the regulator that they can adhere to the necessary regulations.
If PayTM Payments Bank demonstrates a sincere commitment to rectify the compliance issues, there may be room for redemption. The company should work diligently to address the issues mentioned in the audit report and showcase a robust risk profiling system. The RBI, as a responsible regulator, may consider giving PayTM a chance to rectify the situation.
Likly Impact On PayTM Stock
Going by the fundamentals, PayTM was never a sound stock to invest in. Company has been delivering negative return ratios and has been losing money in the business. Year after year, company has been posting losses (though narrowing down in recent quarters !!!).
And yet, the stock is commanding a market cap of Rs.48,000 Crore. Several retailer investors who try to emulate the likes of Warren Buffett, falling prey to the ruthless market forces.
In Nov 2023 itself, Warren Buffett’s Berkshire Hathaway exited Paytm Stock at a loss, saving themselves from a significant capital erosion. In one of our previous articles (link below), NSEOptions.in covered this event.
Foreign Institutional Investors (FIIs) have been very smart in this counter. FIIs held 77.26% of the stock in Sep 2022 and have been gradually offloading their holding to DIIs and Retail Investors, bringing it down to 63.72%.
Softbank, the parent entity of PayTM, has been cutting its stake over the last few quarters. Currently, it holds only 5.01%.
Even after these sell offs by biggies, it is surprising to see some of the brokerages upgrading price targets for the stock.
While there will be knee-jerk reactions in the stock due to RBI’s action, the coming weeks will be critical in determining its fate and the level of commitment the company demonstrates towards rectifying its compliance shortcomings.
Based on individual risk profile, Investors may take a call to remain invested hoping for a recovery or exit the stock looking for better opportunities. Recovery, if any, is likely to take longer than expected time. Investors may control their urge to “bottom fish” the stock which would probably turn out to be fatal.
Disclaimer:
The above content provided regarding PayTM Payments Bank, in this web post is for informational purposes only and should not be construed as financial advice. Readers are encouraged to consult with financial professionals before making any significant financial decisions.
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