The Reserve Bank of India's Wednesday directive ordering the cessation of operations by Paytm Payments Bank Ltd (PPBL) from February 29 effectively ends its operations, global research and broking firm Bernstein said.
In a significant blow to PPBL, the RBI on Wednesday issued a directive instructing the bank to cease all deposits, credit transactions, and top-ups in customer accounts, prepaid instruments, wallets, FASTags, and other related services from February 29, 2024. This move came as an extension of RBI's earlier decision in March 2022, wherein the onboarding of new customers for PPBL was disallowed.
Bernstein said in a note that this latest directive marks the effective end of operations for Paytm Payments Bank. The firm notes that this development adds to the existing regulatory challenges that have cast a heavy overhang on Paytm's business.
While the directive is not expected to immediately impact Paytm's UPI payment business, which constitutes 70% of the Gross Merchandise Value (GMV), there is a potential risk to the payments margin. This is attributed to some of the higher-margin products, such as wallets and FASTags, being dependent on the now-restricted Payments bank entity (PPBL), the firm added,
However, Bernstein analysts indicate that there is no immediate risk to the loan distribution business – the regulatory challenges faced by Paytm extend beyond the recent directive, as the payment aggregator licence for the company is still pending approval, unlike most of its peers which have already received the licence. Additionally, recent constraints on the growth of the Buy Now Pay Later (BNPL) product suggest that regulatory pressures might have played a role in limiting its expansion, Bernstein added.
According to Global Financial Services Macquarie's assessment of Paytm, the implications for revenue and profitability in the medium to long term could be substantial and warrant close monitoring.
"We think revenue & profitability implications in the medium to long term could be significant & remain a key item to monitor. We have seen RBI take 15 months time to revoke its ban on digital business activities of the largest private sector bank. However, in this case since the first ban (in March 2022) for onboarding new customers (22 months have lapsed), RBI has conducted a comprehensive IT audit and continued to identify non-compliance, which in our view indicates that these lapses are quite material."
"Accordingly, we do not see any near term solution to these problems and this effectively means, in our view, that RBI is indirectly revoking the PPI (pre-paid instrument) licence of Paytm."
"The bigger issue is Paytm has not been on the good books of the regulator and going forward, their lending partners also could possibly re-look at the relationships in our view," it added.
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