Whats the reason behind the End of PAYTM PAYMENT BANK

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In 2017, Paytm launched Paytm Payments Bank. They started offering banking services. Payments Bank is like a bank to some extent. You can create a bank account, deposit money, and get a debit card. But compared to a normal commercial bank, there are some important differences. Payments banks focus mostly on digital services. There are very few physical branches of payments banks. And according to RBI's Rules, payments banks cannot offer credit card and loan services. Normal commercial banks like HDFC, SBI, ICICI, do not have any deposit limit. You can deposit as much as you want in those banks. But RBI has prescribed a limit for payments banks. You cannot deposit more than ₹200,000 in these banks. I am telling you all this in detail because the current state of Paytm is largely caused by Paytm's Payments Bank. RBI, the Reserve Bank of India, is the central bank of the country. It decides the monetary policy of the country and also works to print money. All the banks and financial institutions in the country have to follow the rules and guidelines prescribed by the RBI.

So on 31st January 2024, the Paytm crash happened because the RBI imposed operational restrictions on Paytm's Payments Bank. RBI said that Paytm's Payments Bank kept violating our rules repeatedly. There was 'persistent non-compliance' by them. And that's why RBI put restrictions on the bank. After 29th February 2024, Paytm's Payments Bank can't accept any new deposits. There can't be money top-ups in customer accounts. New customers can't be on-boarded. And RBI said that all the nodal accounts with this Paytm Payments Bank should be closed by 15th March 2024. Nodal accounts are those accounts which are used by e-commerce and online services businesses. And as far as Paytm Wallet is concerned, you can use your existing balance but after 29th February, you can't deposit any more money in it. So, obviously, this is a major decision by the RBI. And such decisions are not taken in a jiffy. It's not like RBI randomly decided one day to take action on Paytm and implemented these decisions.

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In fact, there is a very long history behind this. The truth is that Paytm was time and again warned by the RBI for years, but it still didn't rectify its actions. In November 2017, Paytm's Payments Bank was launched and in June 2018,

RBI issued the first warning An audit found that Paytm was not following the anti-money laundering regulations properly. And the identity of the customers who made their accounts with their bank was not being verified properly by Paytm. The KYC, or Know Your Customer compliance wasn't adhered to by Paytm.

So RBI told Paytm to stop onboarding new customers until it fixes all these issues. Paytm took some action regarding this warning because in January 2019, RBI allowed Paytm to resume onboarding customers. The restrictions were removed.

But after 2.5 years, in October 2021, came the next big shock. A fine of ₹10 million was imposed on Paytm. Because while filling in their licence application, they submitted incorrect information and documents. The issues that RBI had flagged before customers not being verified properly, regulations are not being followed properly
The same issues were seen again. Once again, customer onboarding had to be stopped. In October 2023, another huge fine was imposed on Paytm this time, it amounted to ₹50 million.

RBI hoped that after 2 warnings and 2 fines, Paytm would meet the regulatory requirements and start verifying its customers properly. But even after all this, Paytm did not take these seriously. And for this reason, on 31st January 2024, RBI had to take concrete steps. Since Paytm could not follow the rules and regulations properly, RBI had to stop its operations. RBI's findings were very shocking. According to CNBC, Paytm allowed hundreds of thousands of customers to open bank accounts with them without proper KYC documentation. There were thousands of cases where thousands of customers had opened multiple accounts using the same PAN card. In some accounts, transactions were worth millions of rupees. Here, the risk of potential money laundering was evident. It is possible that money laundering was taking place through Paytm. Outlook reported that according to an analyst, Paytm had around 350 million wallets. Of which around 310 million wallets are inactive, no one is using these. And in the remaining 40 million wallets, most of them have no balance or very little balance. Because of this, they can be used like mule accounts. A Mule account is an account that is used for illegal activities, like money laundering.

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After this, there are concerns about data privacy too. RBI said that Paytm's parent company, One97 Communications Ltd, there is no operational segregation between it and Paytm Payments Bank. There was cash flow between the two, which was not disclosed in the financial statements. So many rules and regulations were ignored. Is the arrogance of their CEO Vijay Shekhar Sharma responsible for this to some extent?
He gave many interviews to media channels this arrogance was seen in his words in those interviews.
"If you fundamentally believe that Paytm is #3 payment player, that is where the beginning of the problem is in understanding."
"I'm surprised that people don't know this in this country, but we make profit, so it is."
"Somebody who has not met us and has an opinion on us is not my opinion to keep an opinion on that."

After RBI's announcement on 31st January, a commotion broke out. People started taking out the money they had invested in Paytm. So, Paytm's stock crashed very fast. To calm people down, Paytm posted on its social media handles that there was nothing wrong. On 2nd February, Vijay Shekhar Sharma tweeted this. "To every Paytmer, Your favourite app is working, will keep working beyond 29th February as usual... For every challenge, there is a solution and we are sincerely committed to serve our nation in full compliance. India will keep winning global accolades in payment innovation and inclusion in financial services." As you can see, once again, patriotism was used as a shield here. 'Don't see us as a company, see us as patriots serving the nation.' Using India as the shield Paytm tried to hide behind it. This reminds me of a quote. "Patriotism is the last refuge of a scoundrel." You must have heard this quote. In my opinion, we should be wary of such companies which rely too heavily on nationalism. A few years ago, there was a phone Freedom 251. They printed India's national flag on the back of the phone. It was sold as the 'world's cheapest phone' but it turned out to be a big scam. If a company's products and services have intrinsic value, they sell it by promoting those values. But if they don't have much to say about their products or services, then patriotism is used as a selling point. Urging you to buy their product just because they are Indian. Because they are an Indian company, they use it as the only reason why you should buy their product. Anyways, if we come back to Paytm, the question is, what will happen next? Internally, the employees of the company are facing a lot of uncertainty. They are not getting much clarity from the leadership about what will happen next. Economic Times reported that an executive of the company told them that their business model might change. Now, instead of being a bank, they might try to become a third-party payments app. So they will have to change some things on the back end. And they will have to make the change in a limited time. If you look at Paytm's annual report, to check how much has it earned each year, you will see that it has always been a loss-making company since its shares were listed on the stock market. Look at this chart, in FY 2021, the company incurred a loss of ₹16 billion. In FY 2022, a loss of ₹15 billion. In FY 2023, a loss of ₹1.7 billion.

The good news was that year after year the company's losses were decreasing. So, it could have been expected that next year, that is, this year, in FY 2024, the company would earn its first profit. But now, after everything that has happened, it seems difficult. The company expects that this year, the company's loss could increase by ₹3 billion to ₹5 billion. Paytm has revealed this to the public, saying that they will now comply with the guidelines issued by RBI. But after this announcement, the company's stock price fell further. "What is the path to profitability Vijay? What is... by when will Paytm make money?" "Make more money? By making more money. By making more money!" Vijay Shekhar Sharma will have to come up with better answers to these questions if he wants to convince people. Actually, convincing people will be the biggest challenge for Paytm. An average person is very picky about choosing a company. And public's trust plays an important role here. Once people choose their toothpaste, they decide that they will use that company's toothpaste forever. They don't change their mind easily. Here, they will be more cautious as this involves their money and banking abilities. Bringing customers back won't be easy for Paytm. But convincing customers will come later. First, Paytm will have to convince RBI. That won't be an easy task. But there is light at the end of the tunnel, a way to get out of this can be to have another company buy Paytm's wallet business. A Business Standard report suggests that HDFC Bank and Jio Financial Services might just do this. But Jio has denied this speculation saying that they have no intention of doing so. And anyway, before executing such a sale, they'd need RBI's approval.

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