Fintech Ecosystem in India and Impacts of Paytm on RBI’s Move
A payments bank is a unique model of banking conceptualized by the Reserve Bank of India.A payments bank is like any other bank but operating on a smaller scale without involving any credit risk. In simple words, it can carry out most banking operations but can’t advance loans or issue credit cards. It can accept demand deposits in the form of saving and current account up to Rs 2 lakh. In no circumstances the payment bank can accept term/time deposit.
The payment bank offer remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, internet banking and third-party fund transfers. The payment banks are allowed to invest the money received from customers to government securities. Further the payment bank cannot open or set up subsidiaries to undertake NBFCs activities.
In September 2013, the Reserve Bank of India constituted a committee headed by Dr NachiketMor to study “Comprehensive financial services for small businesses and low-income household”’. The objective of the committee was to propose measures for achieving increased access to diversified financial services, expansion of rural banking and social & financial inclusion. The committee submitted its report to RBI in January 2014. One of the key suggestions of the committee was to introduce specialised banks or “Payments Bank” to cater to the lower income groups and small businesses.
Based on committee recommendations, RBI worked on that, and Airtel Payment bank became the first bank in the unique model of banking. Latter many other entities like India Post Payment Bank, Fino Payment Bank, Paytm Payment Bank and so on received such license.
Paytm Payment Bank
Paytm is an acronym of “Pay Through Mobile”. Paytmwas founded in August 2010 and PaytmPayment Bank came into existence on getting licence from RBI on 28th November 2017.
8 November 2016, a remarkable day in the Indian financial system. The Government of India announced the demonetisation of all Rs. 500 and Rs. 1000 bank note of Mahatma Gandhi Series. This post demonetisation gives a new momentum to digital payment, and it resulted exponential rise in digital payment. The Paytm became one among the other to grab the opportunity and increase the customer base. In FY 2018-19, Paytm payment bank registered Rs. 19 crore profit and became the first profitable payment bank in India. There after in 2019-20 the Paytmregistered its profit of 29.80 crore. With remarkable growth the Paytm became the most popular payment bank in India and subsequently In2021, the Paytm awarded with the status of Schedule bank as recognised by RBI.
However, In June 2018 the RBI barred Paytm Payment Bank from opening new customer accounts, following an audit by the RBI which made some observations about the process, the company follows in acquiring new customers and its adherence to KYC norms. However, in January 2019, it received approval from the RBI to resume on-boarding new customers. In October 2021, RBI imposed a fine of ₹1 crore on thePaytm bank for violating laws pertaining to payments and settlement. Lateron 11 March 2022, RBI prohibited Paytm Payment Bank Limited from on-boarding new customers owing to “certain material supervisory concerns observed in the bank”
In continuation of these actions, and after the validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, RBI ordered the bank to stop onboarding customers and to not accept deposits engaging in credit transactions or making top-ups in customer accounts after 29 February 2024.
Major regulatory breaches
In the recent review RBI found noncompliance in KYC and raised concern over money-laundering. The banking regulator found major irregularities in KYC, which exposed the customers, depositors, and wallet holders to serious risk. These include the absence of KYC for a very large number of customers, PAN validation failures in lakhs of accounts, and single PAN for multiple customers etc. The regulator found that there was an unusually high number of dormant accounts, which are prone to be misused as mule accounts.
During the audit and probe, the RBI also found that in thousands of cases, the same PAN was linked to more than 100 customers and in some cases to more than 1,000 customers. Further it also found that the total value of transactions, running into crores of rupees, was beyond regulatory limits in minimum KYC pre-paid instruments, raising money-laundering concerns.
Impact of RBI Directive to Paytm
Looking the irregularities & non-compliances revealed by external auditors and probe conducted by RBI, the regulator came heavily on Paytm and imposed various restrictions on operations effective from February 29, 2024.Details are as under:-
Deposits and Credit Transactions: No further deposits, credit transactions, or top-ups will be allowed in customer accounts, prepaid instruments, wallets, FASTags, NCMC cards, etc. However, interest, cashbacks, and refunds may still be credited.
Withdrawal/Utilization: Customers can withdraw or utilize balances from their accounts without restrictions, up to their available balance.
Other Services: No other banking services will be provided by PaytmPayment Bank Limited.
Nodal Accounts: The Nodal Accounts of One97 Communications Ltd and Paytm Payments Services Ltd is terminated.
RBI Guidelines says……
Section 35A of the Banking Regulation Act, 1949 empowers the Reserve Bank of India (RBI) to issue directions to banking companies. These directions can be issued for various reasons:
- Public Interest: To Protect the interest of the public.
- Banking Policy: To safeguard banking policy.
- Depositors’ Interests: To prevent any banking company’s affairs from being conducted in a manner detrimental to the interests of depositors.
- Proper Management: To ensure the proper management of any banking company.
So, RBI imposed restrictions on Paytm on using authority under Section 35 A of BR act 1949.
Way forward for Digital Payment
It is very true that Paytm have good market share in digital channel. However, on imposition of recent restriction by RBI, the market share is decreasing and Google and Phone are encashing the opportunity. Now Paytm user can easily withdraw their saving in Paytm Payment Bank, and they can switch over to other service providers. The steps to withdraw the money from Paytm:
- Open the Paytm app on your phone.
- Log in with your phone number.
- Select the banking and payment option.
- Choose “to bank account”.
- Select “your bank account” and enter the amount you want to withdraw.
- Authenticate the transaction using your PIN code.
The money can transfer to another bank account using options like UPI (Unified Payments Interface), IMPS (Immediate Payment Service), or RTGS (Real-time Gross Settlement). There are many PSBs&Pvt. Bank are providing same facilities with some added features. SBI, HDFC Bank, ICICI Bank, Axis Bank, Canara Bank, Union Bank etc are offering wide range of services, including savings accounts, fixed deposits, and loans. There are two other payment banks named Airtel Payment Bank &Jio Payment bank are also providing services like Paytm. Further Google Pay &Phonepe are providing services like digital wallets and with these wallets our bank account can be linked too. Unified PaymentsInterface (UPI) Apps BHIM is a government-backed UPI and it facilitates instant fund transfers between bank accounts. Further Amazon pay also allow us to make payments, recharge, and shop online.
Thus, in today’s scenario the wallet users as well as digital channel payment users are having bundle of opportunity to avail services of various service providers and without hindrance they can enjoy the benefits of digital payments.