When the Reserve Bank of India (RBI) announced partial suspension of Paytm Payments Bank operations, it evoked criticism that the regulator was high-handed in dealing with a new-age fintech firm. Despite clear indications of non-compliance, the payments bank founded by a first-generation entrepreneur still enjoys sympathy.
However, the truth is that the regulator had given the firm ample opportunities to mend its ways. The Paytm Payments Bank saga is a sordid tale of continued disregard for compliances and regulatory norms. Due to the very nature of its business, non-compliance of regulatory standards is a cardinal sin for a banking company.
While the banking regulator has not spelt out the exact reasons for putting restrictions on the payments bank’s operations, it has indicated “persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action”.
It is being speculated that the China exposure of the bank’s parent company—One97 Communication—might have led to such stringent action. But the bank has been under regulatory scrutiny for quite some time. Time and again, RBI has taken some action or other against Paytm for its failure to keep up with regulatory rigours expected from a bank.
Last year, the regulator levied a penalty on the bank, for failing to identify beneficial owners of entities it onboarded for providing regulatory services. It also pointed out the bank's failure in monitoring payout transactions and carrying out risk profiling of entities availing payout services. The bank even breached the regulatory ceiling of end-of-the-day balance in certain customer advance accounts availing payout services.
The banking regulator has in the past also pointed out delays in reporting cyber security incidents by the bank, and loopholes in its customer identification infrastructure. In 2022, RBI had raised concern over the bank’s IT system and had temporarily stopped onboarding new customers.
There are serious questions on the systemic risk that the vast fintech ecosystem poses to the country’s financial system. If compliances are not strictly adhered to, it leaves millions of people exposed to cyber financial frauds. The RBI action against Paytm should send a strong message to other fintech companies to get their house in order.