RBI Prohibits Paytm Payments Bank From Onboarding New Customers

It has been directed to appoint an IT audit firm to conduct a system audit of its IT system, says the RBI notification

The Reserve Bank of India on Friday prohibited Paytm Payments Bank from onboarding new customers, according to a directive issued by it under the Banking Regulation Act.

Further, the bank has been asked to appoint an information technology (IT) audit firm to conduct a comprehensive audit of its IT systems.

Onboarding of new customers of the bank would be subject to specific permissions that the Reserve Bank of India will grant based on the audit report presented by the auditors.

"This action is based on certain material supervisory concerns observed in the bank", according to the directive.

The news comes as Moneycontrol has suggested that Paytm would be applying for a license of a small finance bank by June this year, based on sources. It would apply for a license as a small finance bank on completing five years as a payment bank, which commenced on May 23, 2017. This conversion from payments bank to small finance bank is permitted by the guidelines on small finance banks. According to the story above, such a conversion has never been done, and it would be a first in India.

Payment banks operate without the ability to lend, like a commercial bank. However, payment banks can accept deposits (upto ₹1 lakh), can issue remittances and third party fund transfers, ATM cards and debit cards and can accept digital payments from other or through purchases. However, it cannot issue credit cards.

A small finance bank, in comparison, is a scheduled bank, but with certain social objectives. These goals are to further financial inclusion:

  1. By enabling means of savings to the financially unserved and underserved
  2. Supplying credit to small business units, farmers, micro and small enterprises, and the unorganised sector through a low-cost and high-technology operation model

One97 Communication, the parent company of Paytm, closed 0.07%, or ₹0.55 higher on the National Stock Exchange, at ₹776.15. The notification by the RBI came after market hours. The stock price has fallen nearly 64% from its IPO price of ₹2,150.

The RBI's notification can be read below.

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