Scroll Top

BANKING ON COMPLIANCE: THE RBI LICENSE JOURNEY AND PAYTM’S VALUATION TURBULENCE

INTRODUCTION

Under Section 22 of the Banking Regulation Act (BRA), 1949, the Reserve Bank of India (RBI) exercises exclusive authority in granting banking licenses in India. It stipulates that no company or entity can initiate banking operations in India without possessing a banking license issued by the RBI. The RBI’s role in licensing is crucial for safeguarding the stability of the financial sector by allowing only reputable and well-regulated entities to enter banking. The act of licensing conducted by the RBI fosters public confidence in the banking system by signifying that licensed entities adhere to stringent regulatory standards and possess the necessary capabilities to function as banks[1].

LICENSING CRITERIA

The Reserve Bank of India, functioning as the authoritative body for granting licenses, establishes prudent standards that applicants must adhere to. These encompass factors about the sufficiency of capital, governance, risk management, and compliance with various regulations. Applicants must exhibit financial stability, and the Reserve Bank of India scrutinizes the financial viability of the proposed bank to guarantee its steadfastness and capability to fulfil financial responsibilities. The Reserve Bank of India evaluates whether the individuals responsible for overseeing the operations of the bank are suitable and competent to hold their positions. This evaluation is of utmost importance in safeguarding the stability and honesty of the banking system.

ELUSIVE LICENSE

Due to the exhaustive and meticulous selection process and the stringent eligibility criteria set forth by the Reserve Bank of India (RBI), attaining a payment license has become an arduous task that seems almost insurmountable. One can vividly recall the instance of AU Small Finance, who, against all odds, managed to secure the esteemed small finance banking license in the year 2017[2]. However, fear not, for there exists a clandestine route, a shortcut, if you will, to obtain the coveted banking license, and that is none other than to embark upon the journey of acquisition, amalgamation, or merger with an existing banking entity. This audacious strategy has been brilliantly executed by the Centrum Group and the Bharat Pe Consortium, who, through their sheer determination and astuteness, successfully acquired the beleaguered Punjab and Maharashtra Corporation Bank in the year 2021[3]. Thus, this exemplifies the ingenious manner in which an aspiring entity can ingeniously circumvent the stringent regulations imposed by the RBI and ultimately realize its aspiration of obtaining a banking license.

PAYTM PAYMENTS BANK CRISIS

To acquire a license for Payment Banks in India, a minimum paid-up capital of 100 crores is required. However, Payment Banks are not authorized to engage in transactions involving intricate financial products. Consequently, the Capital Adequacy Ratio (CAR) is determined per the criteria established by the Basel Committee. Additionally, the Payment Bank must ensure that at least 15% of its Risk-Weighted Assets (RWA) are satisfied, with the possibility of a higher percentage being determined by the Reserve Bank of India (RBI) on occasion[4]. This ground-breaking concept was introduced by the RBI after Paytm successfully obtained its payment bank license in 2015, subsequently launching its operations in 2017[5].

Paytm Payments Bank serves as a pivotal banking partner for Paytm, playing a crucial role in its functioning. For example, any funds deposited into Paytm’s widely-used digital wallets are securely held by Paytm Payments Bank. Remarkably, the bank accommodates the staggering number of 330 million wallet accounts belonging to Paytm, ultimately ensuring that the money stored within them is safely deposited with the payments bank[6].

On the last day of January in the year 2024, the Reserve Bank of India (RBI) issued a decree proclaiming that commencing in March, Paytm Payments Bank, which serves as a subsidiary of Paytm, will no longer be accepting any deposits into its various accounts or wallets. Essentially, this means that Paytm Payments Bank will be required to cease all of its banking services starting in March. The impact of this decision is quite significant. Paytm Payments Bank currently holds custody over a staggering 33 crore wallet accounts, which contribute approximately 30% towards Paytm’s consolidated revenue. Moreover, in the fiscal year ’23, Paytm Payments Bank managed to generate a revenue of ₹2,356 crore, out of Paytm’s total revenue of ₹6,028 crore. The regulatory action taken by the RBI is a direct result of persistent non-compliance and numerous supervisory concerns that are associated with Paytm Payments Bank. The specifics of these concerns and shortcomings have not been disclosed by the RBI, but it is worth noting that this decision follows a series of warnings that have been issued over the past two years[7]. Revenue Secretary Sanjay Malhotra stated that if any new allegations of fund siphoning are discovered, the Enforcement Directorate (ED) will investigate Paytm Payments Bank.

In the wake of the stringent actions taken by the Reserve Bank of India (RBI), the stocks of One97 Communications Ltd, the company behind the renowned Paytm brand, experienced a significant decline of 40% over the past two days. On February 2nd, the stock plummeted by 20% to ₹487.05, marking the lowest permissible trading limit for the day on the Bombay Stock Exchange (BSE). Within this short period, the company’s market capitalisation depreciated by a staggering ₹17,378.41 crore (equivalent to ₹Rs 30,931.59 crore). Consequently, Paytm’s valuation dropped to $3.7 billion, following a loss of $2 billion on the Mumbai bourses this week. It is worth noting that, since its initial public offering (IPO) in 2021, which placed Paytm’s value at approximately $20 billion, the stock has now experienced a substantial decline of 75%[8].

CONCLUSION

Paytm, being a prominent player in the digital payment industry, needs to adhere to the regulatory norms established by the Reserve Bank of India (RBI) to ensure the smooth functioning of its operations. Moreover, Paytm must enhance its transparency when it comes to its banking policies, especially concerning its Know Your Customer (KYC) policies. By doing so, Paytm can effectively rebuild the trust it once had among the general public, thereby reducing the risk of having its license cancelled by the RBI. The repercussions of such an event would be catastrophic not only for the company itself, but also for its management, investors, shareholders, and most importantly, its depositors. It is, therefore, the sole responsibility of the RBI to diligently monitor the activities of banks, ensuring their compliance with the regulatory norms set by the RBI. This is crucial to safeguard the interests of depositors, as any negligence in this aspect could prove detrimental. In light of these circumstances, Paytm must address these concerns proactively and with utmost transparency, to overcome these challenges effectively.

Author(s) Name: Tinku Garg (Symbiosis Law School Pune)

Reference(s):

[1] India Code,’ Licensing of Banking Companies’ (India Code) <https://www.indiacode.nic.in/show-data?actid=AC_CEN_2_11_00002_194910_1517807317779&sectionId=19228&sectionno=22&orderno=33#:~:text=%5B(1)%20Save%20as%20hereinafter,may%20think%20fit%20to%20impose.%5D> accessed 10 Feb 2024.

[2] Reserve Bank of India, ‘Press Releases’, (Reserve Bank of India,2017) <https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=40212> accessed 10 Feb 2024.

[3] CNBC TV 18, ‘RBI allows Centrum-BharatPe to acquire PMC Bank’, (CNBC TV 18, 2021) <https://www.cnbctv18.com/finance/rbi-allows-centrum-bharatpe-to-acquire-pmc-bank-what-bharatpe-ceo-has-to-say-about-its-future-9715281.htm> accessed 10 Feb 2024.

[4] Reserve Bank of India, ‘Press Releases’, (Reserve Bank of India,2017) <https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=2229>  accessed 10 Feb 2024

[5] LegalRaasta, ‘Payment Bank License in India’, (LegalRaasta, 2022) <https://www.legalraasta.com/payment-bank-license/> accessed 10 Feb 2024.

[6] ZEEBusiness, ‘Report’, (ZEEBusiness, 2024) <https://www.zeebiz.com/companies/news-money-laundering-concerns-and-kyc-non-compliance-led-to-ban-on-paytm-bank-by-rbi-report-274977#>accessed 10 Feb 2024.

[7] Upstox, ‘Payment Crisis’, (Upstox, 2024) <https://upstox.com/news/market-news/stocks/paytm-crisis:-rbi%27s-action-and-what%27s-next/> accessed 10 Feb 2024.

[8] The Hindu, ‘Paytm Payment Banks Meltdown’, (The Hindu, 2024) <https://www.thehindu.com/business/Industry/paytm-payments-bank-meltdown-its-meaning-explained/article67810645.ece#> accessed 10 Feb 2024.