THE Reserve Bank of India (RBI) action against digital payment and services app Paytm barring its Paytm Payments Bank Ltd (PPBL) from accepting deposits or top-ups is a stern warning to the banking sector to get its house in order when it comes to compliances. By stopping Paytm from accepting top-ups in any customer accounts, prepaid instruments, wallets and FASTags after February 29, the apex bank has drawn a clear line for fintech companies and related start-ups that it would not dither on adopting harsh measures if it is concerned with custody of public wealth. This is not the first time Paytm has found itself in the RBI’s firing line. In fact, the digital payment app has remained controversy’s favourite child. In March 2022, the central bank had asked Paytm Payments Bank not to onboard any new clients which still remains in force.

 

The latest action confirms that the app service was still found wanting on its corporate governance standards.Without adhering to the compliance standards, legitimately raised by the RBI after major setbacks to the Indian banking sector, Paytm was always chasing an elusive banking licence dream. The RBI has effectively put paid to the dream despite company CEO Mr. Vijay Shekhar Sharma’s optimism of overcoming this “speed bump”. After the RBI action, a lot of issues have come to the fore regarding Paytm Payments Bank Ltd’s working. The central bank has acted only after it found several violations of regulatory norms including rules related to money-laundering and transactions to related parties. There was repeated failure on part of the PPBL in heeding to warnings by the RBI. High-level of interdependence between PPBL and other group entities had also raised red-flags over some time as the company kept floundering on the issue of potential conflict of interest.Then there is the China angle. Mr. Sharma had bought a 10 per cent stake from China’s Ant Group Company a few months ago.

 

The Chinese group was among the initial backers of the start-up. Taking into consideration the tense relations between Beijing and New Delhi, the connection kept lurking out as a sore thumb. It seems, the company was not able to satisfy RBI’s concerns on the matter of taking country’s wealth to entities having questionable connections. The Paytm saga has multiple signals for the fintech industry in India. Many of these are still growing start-ups aiming to enter the payments bank industry through Unified Payment Interface services. As the backbone of the fintech sector in India is huge venture money coming from different entities, it becomes doubly important for the sector to scrutinise its private investors given the raised levels of regulatory scrutiny by the RBI in fintech as well as banking sectors. The RBI order against Paytm needs to be seen in the context of the larger ecosystem. Noting that banks are the custodians of huge public wealth, the central bank has the moral responsibility of keeping the ecosystem absolutely safe. It entails regular and strict scrutiny of the fintech and banks and stringent action to correct anomalies. The RBI’s order on Paytm shows that even one of the oldest and most established fintechs can face regulatory action if it does not adhere to the highest compliance standards. After all, it is an issue of trust.