What is the Paytm Payments Bank crisis?

The Reserve Bank of India (RBI) has barred the Paytm Payments Bank Ltd (PPBL), the payments bank subsidiary from getting top-up's and deposits ahead in its wallets and accounts from 29th February. The PPBL was stopped from on-boarding customers in March 2022.

The move made now comes after the release of an audit report that discloses "persistent non-compliances and continued material supervisory concerns in the bank".

Instructions of RBI

The Paytm subsidiary has been barred from accepting any further credit transactions, top ups, or deposits into its accounts of operated walled from the last day of February. Therefore rule is applicable to its prepaid instruments for National Common Mobility Cards (NCMC) and FASTags. It is important to note that present customers however, would be permitted to make use of their existing balances to make use of the services. The payments bank holds more than 330 million wallet accounts of the One97 Communication. 

Additionally, the PPBL has been barred from carrying any banking services. It is also barred from UPI and bill payments. The RBI has also instructed it to "terminate the nodal accounts of Paytm Payments Services and its parent company at the earliest". It has been directed to terminate before 29th February.

The Reserve Bank of India has also instructed to subsidiary to settle all the nodal accounts transaction by the last date of February this year. It has been asked by the regulator that no further transactions shall be allowed thereafter. Researchers are of the view that this would reserve in profitability implications in the long term. Additionally, researchers believe that since there is no near-term solution, the Reserve Bank of India is actually indirectly withdrawing Paytm's prepaid instrument license.

As per the parent company, this would lead to a "worst case impact" of Rs 300 to 500 crore on its annual Earnings before interest, taxes, depreciation, and amortization (EBITDA).

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Paytm's plans ahead

In response, the company has said that it would not be working with PPBL. Rather, it would turn its head to other banks. Additionally, it plans to stretch third-party bank partnerships for the merchant acquiring services with other banks. Bhavesh Gupta, the Chief Operating Officer and President, says that the migration will be taking place in three stages. The first stage would involve looking for an interested partner bank that can integrate with the required Paytm ecosystem. The second stage would involve analyzing the ensuing commercial viability. The third step would involve steering the migration on account-to-account basis. This step would require a lot of time. The other option for this would be a one-time migration.

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There are many issues and concerns in the situation. The first is related to the licensing. The guidelines by RBI state that entities are not allowed to undertake any lending activities. PPBL, on the other hand, is not involved in lending directly. Rather, it offers credit-dispensing products through third parties.

The second issue is related to the governance structure.

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