RBI Imposes Action on Paytm Payments Bank Ltd: What Happen Next

Paytm Payments Bank Banned by RBI This news is spreading very fast on the internet and it is being heard and seen everywhere that RBI (Reserve Bank of India) has banned Paytm Payments Bank. Now it was fine till now but the problem is that people are facing the problem of understanding whether RBI has banned the entire Paytm or only Paytm’s own bank Paytm payments Bank?

There are 30 crore wallets in Paytm, 3 crore people have bank accounts and 80 lakh Fastags, which means 1.6 billion UPI transactions happen every month in Paytm. If we talk about UPI in India, then Paytm comes at number three. But after the RBI notification of January 31, 2024, it seems that there is going to be a major impact on Paytm Payments Bank and Paytm Fastags.

Now if you read this notification by going to the official website of RBI, then it will be difficult for you to understand what all the announcements RBI has made against Paytm Payments Bank. But with the help of this article, you can understand this entire notification very easily and before this article ends, you will understand why Paytm Payments Bank Banned by RBI?

Paytm Payments Bank Banned by RBI:  January 31, 2024 Update

What has RBI announced in this update?

1. Transaction Restrictions from February 29, 2024

Starting February 29, 2024, customers will not be allowed to make additional deposits, credit transactions, or top-ups in various accounts and instruments, such as customer accounts, prepaid instruments, wallets, Fastags, and NCMC cards. Exceptions include interest, cashbacks, or refunds which may still be credited at any time.

Basically we use their wallet, Fastags and their prepaid instruments and Paytm’s savings accounts, so now you will not be able to use all these from 29th February.

2. Withdrawal and Utilization without Restrictions

Customers of Paytm Payments Banks are free to withdraw or use their balances without any limitations, up to the available balance in their accounts. This includes savings bank accounts, current accounts, prepaid instruments, Fastags, and National Common Mobility Cards (NCMC).

That means you will be able to use them only as long as there is balance in your savings bank accounts, current accounts, prepaid instruments, Fastags, and National Common Mobility Cards (NCMC) accounts. After this this product will stop working for you.

3. Cessation of Certain Banking Services from February 29, 2024

After February 29, 2024, the bank will discontinue several banking services, except for withdrawals and utilization mentioned earlier. This includes fund transfers such as AEPS, IMPS, BBPOU, and UPI facilities.

Please note here that apart from all the services we have discussed in point 2, all the other banking services like AEPS, IMPS, BBPOU, and UPI etc. will continue even after 29th February.

4. Termination of Nodal Accounts

The Nodal Accounts associated with One97 Communications Ltd and Paytm Payments Services Ltd. are required to be terminated promptly, and in no case later than February 29, 2024.

Now, so that Paytm is not able to pull out any other loop fall, RBI has specifically said that the nodal account of Paytm’s parent company One97 should also be closed immediately. And RBI has given time till March 15, 2024 to Paytm to settle all these transactions.

5. Completion of Pending Transactions and Closure of Nodal Accounts

All transactions initiated on or before February 29, 2024, including those involving nodal accounts, must be settled by March 15, 2024. No further transactions will be permitted beyond this date.

Description of this update in simple language:

See Paytm and Paytm Payments Bank are two different companies and Paytm Payments Bank comes under the purview of RBI and RBI has given a notice that all the services of Paytm Payments Bank should be stopped immediately. Therefore, if you have a savings or current account in Paytm Payments Bank, then you should withdraw money from your account and close it immediately.
If you have Paytm’s FASTag and that FASTag is linked to Paytm Payments Bank, then you should get it shifted immediately. And if you have a Paytm wallet and your wallet is linked to Paytm Payments Bank, then you should withdraw money from it and close it immediately.
If you use Paytm UPI and your UPI is not linked to Paytm Payments Bank, rather you do all your UPI transactions from some other bank account, then it will not make any difference. But if your UPI is linked to Paytm Payments Bank, then you should stop it immediately. And you have to do all this before February 29, 2024 because after this it is possible that your transactions may start failing.

Why is Paytm Payments Bank banned by RBI?

The thing to think about right now is why is RBI taking such strict action against Paytm Payments Bank? Because we have seen that RBI keeps imposing fines and penalties on banks but suddenly stopping all the services of a bank is a mysterious incident.

On 31 January 2024, RBI Bank had issued this notice against Paytm. In which it is clearly stated that almost every service of Paytm Bank will be banned from 29 February 2024.

Now there are mainly 4 reasons behind RBI completely shutting down all the services of Paytm Payments Bank –

1. Improper KYC

RBI had conducted an audit of Paytm in October 2023 in which they had discussed many lapses.

Paytm Payments Bank had started onboarding customers without KYC and large transactions were being done in these accounts. In such a situation, it became difficult for RBI to establish where so much money was coming from? Paytm had given its KYC service to a third party agency and Paytm did not have answers to RBI’s questions. Even after RBI pointed out these facts, Paytm did not close these accounts, yet transactions continued in these accounts. After this, a show cause notice was sent by RBI to Paytm payments bank.

RBI raise a show cause notice against the Paytm

2. Related Party Transaction

As we told you that Paytm and Paytm Payments Bank are two different companies but they have the same promoter. In such a situation, RBI raised a question from Paytm whether Paytm is an independent company of Payments Bank? Is it possible that Paytm money is being transferred to Paytm Payments Bank?

Basically RBI always had a doubt that the control of these payments is indirectly with Vijay Shekhar Sharma and Paytm Payments Bank is not functioning like an autonomous bank.

3. Poor IT System of Paytm

Now it is not hidden from anyone that in the last two-three years RBI has become really strict when it comes to customer data. In fact not RBI but Indian government has become so strict when it comes to public data. That’s why the Indian government had also banned Chinese companies like TikTok, SHEIN etc. Therefore, RBI had conducted an audit of Paytm Payments Bank regarding IT systems in March 2022 in which they found a lot of lapse. In fact after that audit RBI stops Paytm for onboarding new customers.

Poor IT System of Paytm

According to RBI, Paytm’s IT system is quite weak due to which there are high chances of customer data being leaked.

4. Customer Quality

Here RBI had a major issue with Paytm Postpaid. Paytm postpaid is Paytm’s most popular product with 3.7 millions users and 36 million loans distributed till December 2023. The specific problem of RBI here was regarding customer complaint and quality of borrowers. 40% Paytm Postpaid Customers go on to take loan from paytm app. And as per RBI guideline, Paytm Payments Bank cannot give you loan but Paytm was selling loan in the name of Postpaid Product. That means indirectly they were selling loans to people which they are not allowed to do.

However, it is clearly mentioned in this notice that this will not have any impact on Paytm’s UPI (Unified Payments Interface).

What Happen Next:

If Paytm was your primary instrument through which you used to do all your financial transactions whether it was your wallet reload or you were using NCMC card or using their other products then definitely it is a very big news for you. After this, Paytm will be given time to follow these guidelines of RBI and when it completes these compliances, only then will RBI lift the ban.

Recently it has been observed that RBI has been taking very strict actions. For the last two-three years, unprecedented action has been taken against all Fintech companies and startups, even Amex, Mastercard and HDFC have not been left out.

I think this ban will have huge repercussions not just on Indian fintech startups but for the startup ecosystem altogether. The future IPOS will be more bleak, retail investors would be more skeptical before investing in any such companies. Basically the entire ecosystem will set back by at least 3 to 4 years. Personally we have huge respect for Vijay Shekhar Sharma. He is one of the Pioneers of the Indian startup ecosystem and will be rooting for him from the sideline. We really hope that Paytm and Vijay Shekhar Sharma find the way out of this.


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