RBI's diktat against Paytm Payments Bank is a new risk for Vijay Shekhar Sharma's listed parent firm

A third violation in as many years of the Reserve Bank of India's  (RBI) guidelines by Vijay Shekhar Sharma’s payments banking unit, Paytm Payments Bank, is a new risk for the already battered holding company , One97 Communications, whose market price on the bourses is already reduced to less than half since its IPO was launched last year.

The frequent regulatory breaches will spoil its chances to get the Small Finance Banking (SFB) licence. In fact, Paytm Payments Bank was seriously considering moving an application for conversion into an SFB. The current RBI guidelines allow payments bank to convert into an SFB after the completion of the first 5 years.

Paytm is completing the 5-year period in June this year.  

The SFB licence actually opens the door for lucrative lending products, especially small ticket size loans where the interest margins are high. Currently, the holding company is lending via tie-ups with banks and NBFCs.   

In a latest regulatory action, the RBI has directed Paytm Payments Bank to stop 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. "Onboarding of new customers by Paytm Payments Bank Ltd will be subject to specific permission to be granted by RBI after reviewing reports of the IT auditors," said RBI.

The move to convert into a SFB, however, will now be delayed because of RBI's latest regulatory action.

The current RBI's diktat will also impact the business of the holding company which is already struggling with losses in the books.

Paytm Payments Bank was a crucial link to not only cross products to consumers and merchants but also provide banking services Paytm UPI, FASTag, current account, savings account, salary accounts, fixed deposits , debit cards etc.

The current RBI action is based on certain material supervisory concerns observed in the bank. The parent company holds 49 per cent equity in the payments bank while Sharma, the founder and CEO,  owns the majority 51 per cent.

While Sharma is a promoter of Paytm Payments Bank, the holding company is not categorised as one of its promoters.

Paytm Payments Bank had faced the regulator's wrath earlier too.

In June 2018, the RBI had prohibited Paytm Payments Bank from opening any new accounts on account of supervisory concern for a period of six months.

Similarly, in July 2021, the RBI had issued a show cause notice to the payments bank for submitting false information to RBI regarding Bharat Bill Payment Operating Unit. The RBI had even levied a penalty amounting to Rs 1 crore on the bank.