Action against Paytm Payments Bank Ltd under Section 35A of the Banking Regulation Act 1949

Action against Paytm Payments Bank Ltd under Section 35A of the Banking Regulation Act 1949

Subject: Economy

Section: Monetary Policy

The Reserve Bank of India (RBI) has imposed restrictions on Paytm Payments Bank effective March 2024 due to concerns about breach and non-compliance with regulatory norms.

Comprehensive System Audit:

• The restrictions follow a Comprehensive System Audit report and compliance validation report by external auditors, indicating persistent non-compliances and material supervisory concerns.

Previous Directives:

• In March 2022, the RBI directed Paytm Payments Bank to stop onboarding new customers and appointed an IT audit firm for a Comprehensive System Audit.

Prohibited Activities from March 1, 2024:

• Paytm Payments Bank is barred from accepting deposits, undertaking credit transactions, or facilitating top-ups in customer accounts, prepaid instruments, wallets, FASTags, and NCMC (National Common Mobility Cards) post-February 29, 2024.

Withdrawal or Utilization of Balances:

• Customers will be allowed to withdraw or utilize balances without any restrictions up to the available balance, including from savings and current bank accounts, prepaid instruments, FASTags, and NCMC.

Prohibited Services After February 29, 2024:

• Apart from fund transfers, utilization, or withdrawal, Paytm Payments Bank is not allowed to provide other banking services, BBPOU (Bharat BillPay Operating Units), and UPI facility after February 29, 2024.

Settlement of Transactions:

• Settlement of all pipeline transactions and nodal accounts initiated before February 29, 2024, should be completed by March 15, 2024, with no further transactions permitted thereafter.

Customer Concerns:

• Following the RBI sanctions, customers expressed concerns on social media platforms regarding wallet balances, fixed and savings deposits, and the ability to use Paytm for UPI transactions.

Market Share and Impact:

• Paytm had a market share of 13% in terms of UPI transaction volumes and 11% in terms of the value of UPI transactions as of October 2023, and the restrictions are seen as a negative development with potential impact on the business.

Business Risks:

• There are potential risks to payments margins, impact on lending business, and risks to earnings / valuations, especially affecting higher margin products such as wallets and FasTag, which are dependent on the payments bank.

About Banking Regulation Act, 1949

The Banking Regulation Act, 1949, is a comprehensive piece of legislation that regulates and governs the functioning of banking companies in India. It provides the legal framework for the establishment, operation, and regulation of banks, with the primary objective of safeguarding the interests of depositors and ensuring the stability and soundness of the banking system.

The act was initially enacted as the Banking Companies Act, 1949, and later its name was changed to the Banking Regulation Act, 1949, effective from March 1, 1966.

RBI’s Regulatory Authority:

• The act empowers the Reserve Bank of India (RBI) to regulate and supervise banks in India. The RBI is granted extensive powers to issue licenses, regulate shareholders’ shareholding and voting rights, and oversee various aspects of banking operations.

Bank Licensing:

• The RBI has the authority to issue licenses to banking companies, specifying the conditions under which they can carry on banking business.

Governance and Management:

• The act provides guidelines for the constitution of boards, the appointment of directors, and the management of banking companies. It aims to ensure effective corporate governance in the banking sector.

Operations and Business Conduct:

• The act regulates the operations of banks, prescribing certain norms and standards to be followed in areas such as lending practices, investments, and risk management.

Audit and Inspection:

• The RBI has the power to conduct audits and inspections of banks to ensure compliance with regulatory requirements.

Control over Moratorium, Merger, and Liquidation:

• The act provides for the imposition of a moratorium, merger, and liquidation of banking companies under certain circumstances, with the objective of protecting the interests of depositors and maintaining financial stability.

Public Welfare and Banking Policy:

• The RBI can issue instructions to banks in the interests of public welfare and banking policy.

Penalties:

• The act empowers the RBI to impose penalties on banks for non-compliance with regulatory provisions.

Section 35A of the Banking Regulation Act, 1949

Section 35A of the Banking Regulation Act, 1949, grants the Reserve Bank of India (RBI) the authority to issue directions to banking companies in order to prevent their affairs from being conducted in a manner detrimental to the interests of depositors or prejudicial to the interests of the banking company itself.

This section empowers the RBI to intervene and take regulatory actions to ensure the stability, proper management, and protection of the interests of depositors in the banking system.

Directional Power:

• The RBI can issue directions to banking companies to prevent their affairs from being conducted in a manner harmful to the interests of depositors or prejudicial to the interests of the banking company.

Regulatory Intervention:

• The section provides the RBI with regulatory tools to intervene in the operations of a banking company if it believes that certain activities may adversely affect depositors or the institution itself.

Ensuring Stability:

• The overarching goal of Section 35A is to maintain the stability of the banking sector and protect the interests of depositors.

Governance and Control:

• The RBI can impose restrictions on banking companies to ensure better governance and control, safeguarding the overall health of the banking system.

In the recent case involving Paytm Payments Bank Ltd, the RBI invoked Section 35A to issue directions and impose restrictions on the bank, citing persistent non-compliances and material supervisory concerns.

What is a Payments Bank?

• A Payments Bank is a bank that does not offer loans or credit cards. It takes deposits up to Rs 1 lakh from its customers. It provides various other financial services such as remittance transfer services, selling of financial products of other banks etc. So a payment bank does not offer loans such as gold loans,business loans, and personal loans. But they can sell the loan products and insurance products etc. of other NBFCs and banks.