According to analysts, the Reserve Bank of India’s March 11 decision to prohibit Paytm Payments Bank from onboarding new clients might be due to a number of factors, including a violation of Know Your Customer (KYC) regulations, data storage, data privacy, and data outsourcing, among others.
The RBI also ordered Paytm Payments Bank, which is owned by Vijay Shekhar Sharma, to hire an IT audit firm to undertake a full system audit of its IT system.
Paytm Payment Bank is required to obtain approval from RBI
“Paytm Payments Bank Ltd will be required to obtain particular approval from RBI after examining the IT auditors’ findings before onboarding new clients. This action is being taken in response to some serious supervisory concerns that have been raised at the bank “According to the regulator.
According to Yogesh Pirthani, a partner at ELP, the RBI has broad authority to impose limits on a banking institution under section 35A of the Banking Regulation Act, 1949. According to Pirthani, the RBI must have sought Paytm Payments Bank’s response on IT-related issues, and if the latter’s response was unsatisfactory, the central bank must have taken such action.
“It is apparent that the RBI is concerned about Paytm Payments Bank’s IT system.” RBI’s main concerns are data privacy, KYC, and data storage. The Reserve Bank of India has urged multinational corporations to locate their data centers in India, which is why American Express was also blacklisted. “The RBI has very explicit requirements on data centers, data storage, data outsourcing, and so on,” explains Pirthani.
Pirthani was alluding to the RBI’s July 14, 2021 order prohibiting Mastercard from onboarding new domestic users onto its card network due to noncompliance with local data storage regulations. Due to several faults in the bank’s online and mobile banking systems, the central bank had also barred HDFC Bank from launching new digital banking projects and issuing new credit cards.
Until the time of publication, an e-mail submitted to Paytm Payments Bank had not received a response.
According to a top expert who commented on the condition of anonymity, the specific extent of Paytm Payments Bank’s breach is difficult to estimate, but it must be severe. HDFC Bank was permitted to continue operating its other services, but Paytm Payments Bank has been told to halt onboarding new customers completely, which will have a substantial impact on the fintech giant’s expansion plans.
This could potentially put Paytm Payments Bank’s intentions to apply for a small financing bank (SFB) license in June on hold. “If the regulator is unsure about your systems and functionality, it will undoubtedly take them longer to grant you the license,” a source added.
On May 23, 2017, Paytm Payments Bank opened its doors. Moneycontrol stated on March 9 that the lender will most likely apply for an SFB license from the RBI by June.
The company has 100 million KYC customers, according to the Paytm Payments Bank website, and it is gaining 0.4 million users every month. According to the bank’s website, “We are also the largest issuer of FASTag with over 8 Million FASTag units issued.” According to Paytm’s results presentation, the company disbursed loans worth Rs 2,181 crore in Q3FY22. In terms of volume, the site disbursed approximately 4.4 million loans from October to December.
The RBI has previously ordered Paytm Payments Bank to suspend onboarding new users. According to sources, Paytm Payments Bank ceased enrolling new clients on its platform in 2018 after the RBI made observations. Paytm is said to have halted enrolling new users following an RBI examination, which found flaws in the company’s procedure for obtaining new consumers and its KYC compliance.