In a decisive move, the Reserve Bank of India (RBI) has ordered Paytm Payments Bank Ltd to halt all banking activities by the end of February, citing persistent non-compliances and supervisory concerns. This regulatory crackdown emphasizes the non-negotiable nature of adherence to compliance standards in the financial sector.
A CLEAR MESSAGE FROM RBI
The RBI, in a statement, unveiled the results of an audit report, indicating “persistent non-compliances and ongoing significant supervisory concerns” within the bank. This revelation prompted the central bank to impose additional supervisory measures, instructing Paytm Payments Bank to cease all banking activities by the end of February. Existing customers, however, are granted the freedom to withdraw funds and deplete prepaid card or wallet balances without constraints.
FOUNDER’S ASSURANCE AMID TURMOIL
Paytm founder Vijay Shekhar Sharma responded to the regulatory action, assuring users that the app would continue to operate beyond February 29. Via X (formerly Twitter), Sharma stated, “To every Paytmer, Your favourite app is working, will keep working beyond 29 February as usual. I with every Paytm team member salute you for your relentless support.”
REGULATORY USE OF SECTION 35A
This isn’t the first time the RBI has wielded Section 35A of the Banking Regulation Act. However, its use typically involves managing mismanaged banks, with consumers usually restricted from withdrawing deposits. In Paytm’s case, the regulator’s allowance for the free exit of all monies raises concerns about potentially depleting the payments bank’s coffers.
PAST BREACHES AND WARNINGS
In October 2023, the RBI had previously taken action against Paytm Payments Bank for breaches related to guidelines for licensing payments banks, cyber security frameworks, and securing mobile banking applications. A system audit revealed a pattern of inadequate Know Your Customer (KYC) checks during customer on boarding and persistent violations of compliance standards.
URGENT NEED FOR OVERHAUL
The recent regulatory action should serve as a wake-up call for the entire fintech industry. Beyond the high-profile nature of companies or their digital stature, foundational principles of cyber security, data governance, and regulatory adherence are non-negotiable. A comprehensive system audit, acknowledgment of deficiencies, and a commitment to addressing them are urgently needed. The critical question remains: Can consumers wait for the overhaul estimated to take 12-18 months? Doubts linger, underlining the imperative for financial entities to prioritize regulatory compliance if they aim to thrive in the finance business.
