The Reserve Bank of India on Wednesday ordered Paytm Payments Bank, a unit of One 97 Communications, to stop its popular mobile wallet business along with other activities, citing persistent non-compliance and supervisory concerns.
The regulator said the firm, which processes transactions for India's digital payments giant Paytm, must stop its banking activities after Feb. 29. Existing customers, however, can withdraw their funds and use up the balance in the prepaid cards or wallets without any restrictions, the RBI said.
The latest decision comes nearly two years after the regulator barred the bank from taking on new customers because it violated certain rules, Bloomberg News had reported. Founder Vijay Shekhar Sharma had then said the bank is fully compliant with Indian rules.
The RBI had asked the bank, which operates under a restricted license that doesn't allow it to lend but accept deposits up to 200,000 rupees ($2,408.4) per account, to stop onboarding customers pending an audit of its information technology system.
On Wednesday, the woes for the bank seem to have worsened with the regulator making scathing observations about its business.
"The comprehensive system audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action," the RBI said in a
The RBI said the bank will not be allowed to take any further deposits or conduct credit transactions or carry out top ups on any customer accounts, prepaid instruments, wallets, cards for paying road tolls after Feb 29. Interest, cashbacks, or refunds can be credited anytime.
Also, special purpose accounts of parent firm One97 Communications and Paytm Payments Services, used to make settlements are to be terminated at the earliest and no later than Feb 29, the RBI said. All settlements in the pipeline will have to be completed by March 15, the central bank added.
The key impact of this order can be on Paytm's lending business if partners limit business due to operational and governance risks, according to Jefferies analyst Jayant Kharote.
The company may also have to wind down its wallet business and merchants using Paytm Bank may be impacted, Kharote wrote in a note.
"This can be key risk to earnings and valuations, and we await details from management" he wrote.
