Explained | Paytm Payments Bank meltdown

New Delhi: Son of a schoolteacher from Aligarh district in Uttar Pradesh, Vijay Shekhar Sharma was enamoured by Jack Ma-run Alibaba's focus on smartphones rather than desktop computers, when he built a digital payments company that would let Indians pay for vegetables, pay utility bills or buy cinema tickets using their mobile phones.

Sharma, the poster boy of India's fintech boom, also set out to build an Alipay-like mobile marketplace to go alongside the payments business, allowing businesses to sell goods from matchbox to iPhones online.

With fame came a set of controversies for arguably the most high-profile of a wave of Indian tech entrepreneurs.

But none like the one now. The current crisis where the Reserve Bank has ordered Paytm Payments Bank to halt most of its business, is an existential one.

Here is a breakdown of Paytm Payments Bank crisis:

What was the recent RBI action against Paytm Payments bank all about?

The regulator last week ordered Paytm Payments Bank Ltd, a restricted bank that can take deposits but cannot lend, to not take any further deposits or conduct credit transactions or carry out top-ups on any customers accounts, prepaid instruments, wallets, cards for paying road tolls after February 29.

Paytm wallet customers can use money till the time their balance is exhausted. They cannot add money after February 29. And in case RBI does not relent, top-up for Paytm wallet will stop and transactions through it would no longer can be carried.

So what is Paytm Payments Bank, and who owns it?

Paytm Payments Bank Limited (PPBL) is an associate of One97 Communications Limited (OCL). One97 Communications holds 49 per cent of the paid-up share capital (directly and through its subsidiary) of PPBL. Vijay Shekhar Sharma has a 51 per cent stake in the bank.

PPBL commenced operations as a payments bank with effect from May 23, 2017. Paytm Payments Bank offered digital banking, including savings accounts, current accounts, fixed deposits with partner banks, and balance in wallets, UPI, and FASTag, among other services.

Paytm Wallet, which comes under PPBL, leads the segment. As per RBI's provisional data for December 2023, Paytm Wallet users carried out 24.72 crore transactions worth over Rs 8,000 crore for purchase of goods and services while 2.07 crore transactions were carried out for transferring over Rs 5,900 crore.

What happened and what it means for customers?

The RBI on January 31 directed the Paytm Payments Bank to stop accepting deposits or top-ups in customer accounts, wallets, FASTags and other instruments after February 29. Withdrawal or utilisation of balances by its customers from their accounts, including savings bank accounts, current accounts, prepaid instruments, FASTags, National Common Mobility Cards, are to be permitted without any restrictions, up to their available balance.

Paytm Wallet users can continue to carry on transactions till February 29. However, after February 29, they will be able to use their existing balance till the time it is exhausted but not add any money to their account.

The same rule is applicable on PPBL accounts, Paytm wallet linked services like FASTag, National Common Mobility Card that are used for travel in metro and other public transport.

What are the alternatives for users?

There are over 20 banks and non-banking entities that offer wallet service. The leading one after PPBL wallet includes Mobikwik, PhonePe, SBI, ICICI Bank, HDFC, Amazon Pay etc.

Similarly, there are 37 banks comprising all the known public and private sector banks like SBI, HDFC, ICICI, IDFC, Airtel Payments Bank which are authorised to provide FASTag. Customers can recharge FASTag online using their banks mobile banking, internet banking or third party apps like Google Pay, PhonePe etc.

Why did Paytm Payments Bank come under RBI lens?

The banking regulator had been frequently flagging off issues.

According to sources, money laundering concerns and questionable dealings of hundreds of crores of rupees between popular wallet Paytm and its lesser-known banking arm had led Reserve Bank of India to clamp down on Vijay Shekhar Sharma-run entities.

Sources further said that PPBL had lakhs of non-KYC (Know Your Customer) compliant accounts and in thousands of cases single PANs were used for opening multiple accounts. There were instances of the total value of transactions -- running into crores of rupees, much beyond regulatory limits in minimum KYC pre-paid instruments raising money laundering concerns, sources said.

What has been the company's response to the RBI's Jan 31 action?

While users have the option to switch to other wallets, and FASTag services etc being provided by other vendors, Paytm management has said that PPBL is in discussion with RBI to comply with their direction for continuing the business.

Paytm has said that its financial services such as loan distribution, insurance distribution and equity broking are not in any way related to PPBL and are expected to be unaffected. The company's offline merchant payment network offerings like Paytm QR, Paytm Soundbox, Paytm Card Machine will continue as usual, where it can onboard new offline merchants as well.

Paytm sees an impact of Rs 300-500 crore on its annual operational profit.

How has One97 Communications' shares responded?

Following the RBI's crackdown, shares of One97 Communications Ltd, which owns Paytm brand, slumped 40 per cent in the last two days. The stock tanked 20 per cent to Rs 487.05, its lowest trading permissible limit for the day, on the BSE on Friday.

In two days, the company's market capitalisation (mcap) eroded by Rs 17,378.41 crore to Rs 30,931.59 crore.