Why has the RBI banned the Paytm bank from taking on fresh banking customers? What will be the impact?

On Friday 11th March, the RBI issued a directive asking Paytm Payments Bank to stop taking on new customers. However, Paytm Payments Bank can continue to service existing customers as before and that will not be impacted. The ban on fresh customers was to review the internal technology and banking processes that Paytm has adopted and put these processes through a stringent process of technical and process audit.

This is similar to the ban imposed on HDFC Bank, wherein the RBI had barred the bank also from taking on fresh credit card accounts due to the sharp rise in the technology and app related complaints received from customers as well as consistent data outages. However, Macquarie is of the view that this directive on One97 Communications would not have any material impact on the Fintech business of One 97 Communications (owner of Paytm).

On the downside, this could be a kind of an impediment in Paytm Bank’s plans to obtain a Small Finance Bank (SFB) licence by converting its payment bank license. However, Paytm has already onboarded more than 6 crore accountholders in a short span of time. Hence, it would only be worthwhile for Paytm to put a halt to fresh customer acquisitions and instead focus on tightening the process and procedures to handle an operation of this scale.

However, market analysts are of the view that this could be a sentiment dampener. Already, the stock of Paytm currently quote around Rs.750, which is nearly 65% below the IPO issue price of Rs.2,150. Amidst the negative sentiment surrounding digital and fintech stocks and questions over the revenue model and cost structure of Paytm, this news could further dampen sentiments on the counter. That is surely a concern.

Also, there is view that while there may not be a direct impact, there could surely be an indirect impact. Paytm Payments Bank houses all key products offered by Paytm including the Paytm wallet. A ban on onboarding fresh customers at Paytm Payments Bank amounts to a ban on fresh customers for Paytm too. In addition, nearly a third of the revenues of Paytm came from the Paytm Payments Bank.

The first thing for Paytm to do now is to appoint an IT audit firm to conduct a comprehensive System Audit of its IT system. RBI will permit fresh customer onboarding only after reviewing the findings of the IT audit.