RBI pulls plug on Paytm Payments Bank, cites depositor risk

The Reserve Bank of India (RBI) on Friday cancelled the licence of Paytm Payments Bank, more than two years after regulatory orders brought its operations to a halt, stating that its continuation served no public interest and was detrimental to depositors’ interests.

“Consequently, Paytm Payments Bank is prohibited from conducting the business of ‘banking’ as defined in Section 5(b) or any additional business specified under Section 6 of the Banking Regulation Act, 1949 with immediate effect,” the RBI said in its order.

The bank had started operations in May 2017.

Payments banks were conceptualized as a separate category in 2015 to reach the under-banked and unbanked masses, accepting deposits of up to ₹2 lakh per customer. But they cannot lend.

To be sure, out of the 11 payments bank licenses originally approved in 2015–2016, roughly half have either surrendered their licenses or discontinued operations. Following the exit of Paytm Payments Bank, India will have five such banks: Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank, and NSDL Payments Bank.

One97 Communications said in a regulatory filing that as previously disclosed on 1 March 2024, the company does not have any exposure to Paytm Payments Bank or any material business arrangements with the payments bank.

“There is no direct financial impact on the Company since, as previously disclosed, the Company had already impaired its investment in Paytm Payments Bank as of 31 March 2024,” it said.

On the eve of the Union budget on 31 January 2024, the RBI issued a directive that sent shares of One 97 Communications Ltd, Paytm’s parent, tumbling 20% the next day. It was one of the steepest single-day falls for the company since its 2021 listing. The regulator barred any addition of funds to Paytm Payments Bank accounts, wallets and FASTags (electronic toll collection systems) after 15 March.

“I would not view the closure of a payments bank in the same way as the shutdown of a universal bank. The payments bank model was, to some extent, an industry and regulatory experiment, so the implications are different,” Pranav Gundlapalle, senior research analyst at Bernstein, told Mint. “Near-term sentiment could remain negative for the stock, even if the eventual business impact is less severe than the market initially assumes.”

“One potential silver lining is that, without the payments bank structure, Paytm may have greater flexibility to pursue an NBFC (non-banking financial company) licence if it wants to deepen its lending presence,” Gundlapalle added. “There is no real middle path left for Paytm now. If the company wants to avoid recurring regulatory uncertainty, the most logical route would be to move into a recognised structure like an NBFC.”

The RBI said it will now make an application for winding up of the bank before the high court, adding that the payments bank has enough liquidity to repay its entire deposit liability upon winding up of the bank.

The regulator said its decision to cancel the bank’s licence was based on four factors. First, the affairs of the bank were conducted in a manner detrimental to the interest of the bank and its depositors. Second, the general character of the management of the bank is prejudicial to the interest of depositors as also the public interest.

Third, it would serve no useful purpose or public interest in allowing the bank to continue. Finally, the bank failed to comply with the conditions stipulated in the payments bank licence.

“Paytm’s core value today lies in payments distribution, merchant acquiring and loan sourcing, not in running a payments bank. In that context, exiting the licence can be strategically positive,” Mohit Agarwal, executive director at Unaprime Investment Advisors, told Mint. “The key question investors may ask is why the licence was not surrendered earlier if the payments bank had already become non-core.”

Another interpretation is that this could be a deliberate simplification move with fewer regulated entities, sharper focus on core businesses and lower compliance overhang, Agarwal added. “The regulatory intensity around banking entities is materially higher than around pure distribution businesses, so exiting that layer may improve focus.”

Paytm has progressively distanced itself from Paytm Payments Bank, exited its board representation in 2024, and has had no material business relationship with the entity since 1 March 2024. The bank’s management and board operate independently while Paytm remains only a shareholder.

Paytm Payments Bank has a history of run-in with the regulator. Mint reported in March 2024 that eventually the regulator ran out of patience. In October 2023, it fined the bank ₹5.49 crore, saying that this was due to non-compliance with certain provisions of the KYC (know your customer) norms, besides others. The KYC guidelines act as a vital safeguard against money laundering by mapping each account to a bona fide customer. Banks have to ask customers for their proof of address and identity before they can open bank accounts.