The Reserve Bank of India has directed Paytm Payments Bank to stop with immediate effect the onboarding of new customers.
“The bank has also been directed to appoint an IT audit firm to conduct a comprehensive System Audit of its IT system,” the RBI said on Friday, adding that the action is based on certain material supervisory concerns observed in the bank.
Onboarding of new customers by Paytm Payments Bank will be subject to specific permission to be granted by RBI after reviewing report of the IT auditors, it further said.
The action by RBI has been taken under section 35A of the Banking Regulation Act, 1949.
Under the section, the RBI can give directions in public interest or to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or to secure the proper management of any banking company generally.
The RBI did not disclose reasons for the decision.
According to sources, the RBI had found various deficiencies with the bank in the past as well. A recent supervisory inspection at Paytm Payments Bank found more such lacunae with regard to KYC and customer onboarding. “Problems persisted despite repeated assurances from the bank and so the RBI took such an action,” the sources said.
Paytm Payments Bank commenced operations as a payments bank from May 23, 2017. Vijay Shekhar Sharma, Founder and CEO of Paytm owns 51 per cent in the bank and One97 Communications holds 49 per cent stake in the lender.
Largest enabler of digital payments
It considers itself to be one of the largest enablers of digital payments in the country. It is also the extensive issuer of Fastags, and is the biggest beneficiary bank for UPI transactions.
As of March 31, 2021, the bank had over 6.4 crore savings accounts, and over ₹5,200 crore deposits, including savings accounts, current accounts, fixed deposits with partner banks, and balance in wallets.
In December last year, the bank had announced its inclusion into the Second Schedule of the Reserve Bank of India Act, 1934, helping expand its financial services operations.
The bank would also be eligible to apply for conversion into small finance bank from May this year. The RBI guidelines for the ‘on tap’ licensing of SFBs allows existing payment banks with successful track record of at least five years to apply for conversion into SFB.
Significantly, the RBI, by an order on October 1, 2021 had imposed a monetary penalty of ₹ 1 crore on Paytm Payments Bank for an offence committed of the nature referred to in Section 26 (2) of Payment and Settlement Systems Act, 2007
“On examination of PPBL’s application for issue of final Certificate of Authorisation (CoA), it was observed that PPBL had submitted information which did not reflect the factual position,” the RBI had said at the time.
The RBI in the past has taken stern disciplinary action against banks and other entities. In December 2020, it had barred HDFC Bank from launching new digital products or services and issuing new credit cards following outages in its mobile and internet banking services.
In August 2021, it had barred Mastercard from onboarding new customers in India due to non-compliance with data localisation norms. It had also taken similar action against American Express and Diners Club International in the past.