homebusiness Newscompanies NewsPaytm Payments Bank Crackdown: Money laundering due to weak KYC processes, bank ownership structure forced RBI’s hand
Paytm Payments Bank Crackdown: Money laundering due to weak KYC processes, bank ownership structure forced RBI’s hand
The RBI's action has led to a significant market capitalisation loss for One 97 Communications Limited, Paytm Payments Bank's parent entity. Paytm has downplayed the impact of the order, emphasising the possibility of overcoming the setback.
It's shutters down for Paytm’s Payments Bank ambitions, at least for the moment, with the Reserve Bank of India (RBI) coming down hard on the fintech giant for lapses in compliance and risk management practices. According to sources, the bank was persistently non-compliant with regulatory guidelines, forcing RBI to bring down the hammer.
Nearly two years after barring Paytm Payments Bank Limited (PPBL) from onboarding any new customers on March 11, 2022, the regulator on Wednesday imposed severe and unprecedented restrictions on the entity, effectively shutting down its banking operations.
Citing “persistent non-compliance, and continued material supervisory concerns” in the payments bank, the RBI barred it from accepting any further deposits, undertaking any credit transactions, or allowing customers to top up their Paytm Payments Bank wallet after February 29, 2024. This made it clear that Paytm Payments Bank could not undertake any banking operations whatsoever after February 29, 2024, barring facilitating the withdrawal or utilisation of wallet balances by customers.
Paytm Payments Bank’s parent entity, One 97 Communications, lost nearly $2.4 billion in market capitalisation in the last two days of trading on the back of RBI’s crackdown on the bank, with One 97's shares plunging nearly 40% between February 1 and 2.
CNBC-TV18 spoke to multiple people directly and indirectly involved in the matter to understand what led to this action from the regulator against Paytm Payments Bank, and two major reasons have emerged.
MAJOR KYC LAPSES
The biggest and most concerning factor for the regulator was the major lapses in PPBL’s Know Your Customer (KYC) processes, wherein the RBI found that no proper checks were done by Paytm Payments Bank to onboard customers (running into lakhs), leading to multiple instances of misuse, including money laundering activities, said people in know.
These inadequate KYC processes led to miscreants using the same PAN Card to open "thousands" of accounts, for instance, leading to fraud. In some cases, sources said, the same PAN was linked to more than 100 customers, and even over 1,000. Fraudsters sometimes even used fake PAN Cards to open accounts, said a person familiar with the matter, on condition of anonymity.
Paytm Payments Bank had little oversight on the end use of these funds, and was often found in violation of anti-money laundering KYC norms with the total value of transitions running into crores of rupees — much beyond regulatory limits in minimum KYC prepaid instruments, the person added. Another matter of concern for the RBI was an unusually high number of dormant accounts, which, the source said, could have been used as mule accounts.
RBI had flagged these concerns to Paytm Payments Bank at least a couple of years before it decided to bar the bank from onboarding any new customers in March 2022, as per people in the know. The RBI had also flagged lapses in the bank’s IT systems then, asking it to appoint a third-party firm to conduct a comprehensive audit of its IT systems. Furthermore, sources said, the compliance reports submitted by the bank were found to be incomplete and false on many occasions.
Just days before RBI’s action, the Indian Highways Management Company (IHMCL), an arm of NHAI, barred Paytm Payments Bank from issuing fresh FASTags, while also banning it from taking up any new toll plazas that are part of the National Electronic Toll Collection. Reports suggested that this action was taken after an audit by IHMCL found that the entity was not complying with the parameters prescribed in the service level agreement (SLA). CNBC-TV18 has reached out to IHMCL and a response is awaited.
PAYTM PAYMENTS BANK SHAREHOLDING STRUCTURE CONCERNS
The other major issue that led to the RBI action was the lack of an arms-length distance between the bank and other entities of One 97 Communications, CNBC-TV18 has learnt.
According to people in the know, the regulator has been flagging concerns about a lack of separation between the operations of Paytm Payments Bank operations and other group entities over the past few years to ring-fence the bank from any potential risks from related Paytm entities.
Paytm Payment Bank’s shareholding pattern shows that the parent entity, One 97 Communications, owns a 49% stake in the bank with the remainder held by founder Vijay Shekhar Sharma in a personal capacity.
The regulator has flagged concerns about increased inter-dependence between the bank and other entities, related party transactions and interference in the bank’s decision-making by its parent entity and founder, said a person with knowledge of the matter.
The person also told CNBC-Tv18 that the bank had significant undisclosed payables to One 97. Additionally, agreements were frequently amended to favour OCL (One 97 Communications Limited) or its group entities, seemingly at the expense of the bank and its clients.
Despite raising these concerns privately with Paytm Payments Bank, and publicly barring the bank from onboarding customers two years earlier, deficiencies were observed in compliance with these observations, prompting RBI to clamp down on Paytm’s banking business, bringing it to a stop, effectively.
Paytm Payments Bank, however, maintains that the parent entity, despite its large shareholding in the bank, exerts no influence on the operations of Paytm Payments Bank whatsoever. "We would take this opportunity to clarify that, as per banking regulations, Paytm Payments Bank Limited is run independently by its management and board. While OCL (One 97 Communications Limited) is allowed to have two seats on the board of Paytm Payments Bank Limited, as a part of its shareholder agreement, OCL exerts no influence on the operations of Paytm Payments Bank Limited other than as a minority board member and minority shareholder," the company stated in a press note issued on February 2.
NO BEARING ON FINTECHS
Sources said that the RBI's order is not an indicator that the central bank is against the fintech industry. The sources added that the intervention was only aimed at safeguarding the financial system, ensuring that a payment bank — a regulated entity dealing in public funds — operates in a manner that doesn't harm the interests of depositors, customers, and legitimate stakeholders.
THE WAY FORWARD
“On behalf of Paytm, I can say that it is more of a big speed bump, but it is something that we believe that, with the partnership of other banks and the capabilities that we have already developed, we'll be able to see through in the next few days or quarters, as the case might be,” said Vijay Shekhar Sharma, trying to allay concerns about the bank’s future in a conference call with analysts following the RBI order.
“There are, obviously, RBI's beliefs, and we believe that there is something that RBI would have seen. Have they sent us details? The answer is no ... what different audits did (the RBI do) and the solutions based on that is (what led to the order). So we don't know exactly what figured, when,” Sharma said, explaining that there was no big reason for RBI’s actions that Paytm was aware of.
As for the impact on the business in terms of a financial hit, Madhur Deora, Chief Financial Officer of Paytm, explained to analysts, “Overall, the worst-case margin, the EBITDA margin impact of that is ₹300-500 crore. We have called that an annual EBITDA impact. I do expect that over time, we'll be able to offset this in a big way, but we have said it will be an annual impact.”
“This ... will have some impact from coming in from lending — we will not be extending loans for maybe a couple of weeks until we solve the operational challenges, and then we go back to normal,” added Bhavesh Gupta, the President and COO of the firm.
The first overhang is when, and more importantly if, the regulator will relax the restrictions on the Payments bank. In previous instances of such actions from RBI, the regulator would word its notification clarifying that whatever restrictions were imposed would be lifted if the entity rectified the deficiency in some form or fashion, which was not the case with Paytm.
Secondly, the concern is whether lending relationships would also take a hit due to reputational risks. Brokerage firm Macquarie noted, “The bigger issue is Paytm has not been on the good books of the regulator and going forward, their lending partners also could possibly relook the relationships in our view.” Macquarie has likened the action to RBI indirectly revoking the PPL license.
And finally, the bigger worry on the street now is whether RBI is done with its penalties just yet, or if a final clampdown is around the corner.
(Edited by : Vijay Anand)
First Published: Feb 2, 2024 6:26 PM IST
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