Paytm Payments Bank will have to appoint an IT auditor in consultation with the Reserve Bank of India (RBI), sources said. The terms of reference of the IT audit will also be decided by the RBI, they added.
Shares of the company hit a lifetime low of ₹662.25 apiece on the BSE on Monday in intra-day trade before closing at ₹675.35. This follows the RBI action on March 11, directing Paytm Payments Bank to immediately stop the onboarding of new customers. The bank also has to appoint an IT audit firm to conduct a comprehensive system audit of its IT system. It can onboard new customers subject to specific permission by the RBI the after reviewing the audit report.
According to sources, the RBI’s concerns stemmed from various deficiencies with the bank over the last few years. A recent supervisory inspection at Paytm found more such lacunae regarding KYC and customer onboarding, and the problems are understood to have persisted despite repeated assurances from the bank.
‘Data leak report false’
A Bloomberg report on Monday said the RBI restriction came as the bank had allowed data to flow to servers abroad in violation of India’s rules, and didn’t properly verify its customers. “Annual inspections by the RBI found that the bank’s servers were sharing information with China-based entities that indirectly own a stake in Paytm Payments Bank,” the report said.
However, the company has denied the report and said the bank’s data resides within India. “The recent Bloomberg report on Paytm Payments Bank claiming data leak to Chinese firms is completely false and simply sensationalising. Paytm Payments Bank is proud to be a completely homegrown bank and is fully compliant with RBI’s directions on data localisation. All of the bank’s data resides within the country,” said a company spokesperson.
Wait could be longer
Experts believe that the lifting of the restrictions imposed by the RBI on the lender could take at least a year.
“Paytm Payments Bank will have to operate more like a bank than a tech company. For the RBI to take such a step, there must have been a major concern. Going by the time taken for HDFC Bank to get the regulatory restrictions lifted, it could take Paytm Payments Bank also at least a year to satisfy the concerns of the RBI,” said Srinath Sridharan, corporate advisor and independent markets commentator.
The action showcases the regulator’s focus in ensuring stability of systems and sanctity of processes, which would necessitate banks to onboard and retain relevant talent, he added.
A report by ICICI Securities also said recent instances of embargo on a leading bank suggest lifting of restrictions may take time. “… it took eight months to partially lift the restrictions and almost 15 months to wholly lift the same,” it said.
In the case of HDFC Bank, the RBI had in December 2020, barred it from launching new digital products or services and issuing new credit cards. The restrictions on credit cards were lifted in August last year, and on business generating activities under the Digital 2.0 programme, just recently in March.
‘Negative surprise’
A Morgan Stanley report said the current announcement from the RBI came as a negative surprise. “Resolution could be some time away, as appointment of an external auditor, IT audit, and review of the same by RBI should take some time,” it said, adding that this is the second time that RBI has banned new customer acquisitions, raising further doubts on compliance procedures at Paytm Payments Bank.
“We were estimating Paytm’s consumer base to grow by 10 per cent in FY23 and monthly transacting users to increase at over 25 per cent run-rate,” the ICICI Securities report said, adding that the company will have to increase its efforts to enhance engagement with the existing user base to offset the adverse impact of the embargo on new users.
“The bank is taking immediate steps to comply with RBI directions, including appointment of a reputed external auditor to conduct a comprehensive system audit of its IT systems,” Paytm had said in a previous statement.