RBI bars Paytm Payments Bank from onboarding new customers

“The Reserve Bank of India has today, in the exercise of its powers, inter alia, under section 35A of the Banking Regulation Act, 1949, directed Paytm Payments Bank Ltd to stop, with immediate effect, 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 the report of the IT auditors. This action is based on certain material supervisory concerns observed in the bank”. This note was released by the RBI on March 11, 2022.

Paytm Payments Bank was incorporated in August 2016 and formally began its operations in May 2017 from a branch in Noida. The segment operates as a retail lending arm of the company and is also involved in providing a platform to promote cross-selling across the no. of businesses it operates. The company is able to lend on the back of the deposits and transactions which happen on the platform. The main crux of banking as a business is the trust of the depositors. People trust the goodwill of the bank and upon that trust, they tend to keep savings in various forms of deposits. Raw material for banking business is the deposits by the public. With the help of these deposits, they are able to lend money to the borrower. Having said that Paytm had recently received a scheduled bank status but now this order by the RBI will affect the business significantly.

Section 35 A of the Banking Regulation Act

The Act gives the RBI the authority to initiate steps to prevent the affairs of any banking company from being conducted in a manner that is not in the bank depositors' best interest or is prejudicial in some way to the interests of the company.

As we all know, the core raw material of banks is liquidity and a healthy capital adequacy position, but in the cases mentioned above, people rush out to withdraw their deposits from the bank because they don't want to see their hard-earned savings evaporate due to corporate missteps within the bank. Banks in such instances confront a lack of liquidity, and the bank's demise is not far away. Withdrawal has a negative impact on profitability and a poor capital basis. This adds gasoline to the flames, affecting bank share prices. Restriction under the statute also applies if the RBI seeks to guarantee stronger governance and control within the banking organization.