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Why RBI banned Paytm Bank? 1000 accounts linked to same PAN, Read full report


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According to sources familiar with the matter, one of the primary reasons for the Reserve Bank of India (RBI) imposing strict restrictions on Paytm Payments Bank was the creation of hundreds of accounts without proper identification. These accounts, which had inadequate Know-Your-Customer (KYC) compliance, conducted transactions worth crores of rupees on the platform, raising concerns about potential money laundering.

The RBI discovered that more than 1,000 users had linked the same Permanent Account Number (PAN) to their accounts. Additionally, during verification processes conducted by both the RBI and auditors, it was found that the bank had submitted incorrect compliance information.

Money Laundering Concerns and Actions Taken

The RBI expressed concerns that some of these accounts may have been used for money laundering. As a result, the RBI has not only informed the Enforcement Directorate but also shared its findings with the Ministry of Home Affairs and the Prime Minister’s Office. The Enforcement Directorate will initiate an investigation into Paytm Payments Bank if any evidence of illegal activity is found, as confirmed by Revenue Secretary Sanjay Malhotra.

Non-Disclosure of Major Transactions and Governance Issues

There were also reports of non-disclosure of significant transactions within the Paytm group and associated parties, further exacerbating regulatory worries. The scrutiny by the central bank also revealed governance loopholes, particularly in the relationship between Paytm Payments Bank and its parent company, One97 Communications Ltd.

Additionally, the routing of transactions through the parent app of Paytm raised concerns about data privacy. This led to the RBI’s decision to halt transactions through Paytm Payments Bank. While user deposits in savings accounts, wallets, FASTags, and NCMC accounts are not immediately affected, the company will have to rely on third-party banks for its operations until February 29.

Impact on Paytm and Founder’s Response

Following the RBI’s notice, the stock of Paytm experienced a significant decline, with a 36% drop over two days, resulting in a loss of $2 billion in market value. Paytm founder Vijay Shekhar Sharma, during a conference call with analysts, dismissed the regulatory actions as a “speed bump,” aiming to reassure stakeholders amid the ongoing turbulence.

Concerns about Related-Party Transactions

Another issue that arose was the regular occurrence of related-party transactions between Paytm Payments Bank and other Paytm group companies. The RBI found that the payments bank did not have sufficient measures in place to separate itself from potential conflicts of interest. The high level of interdependence between Paytm Payments Bank and other group entities raised concerns about the autonomy of the bank and the indirect control that founder Vijay Shekhar Sharma had over its decision-making and operations.

In March 2022, the RBI instructed Paytm Payments Bank not to onboard any new clients, a directive that is still in effect. Paytm Payment Services, an affiliate firm, generated Rs 149 crore and Rs 372 crore from Paytm Payments Bank in FY23 and FY22, respectively, by providing services. In return, Paytm Payment Services paid Rs 212 crore and Rs 317 crore to Paytm Payments Bank as processing charges in FY23 and FY22, respectively, according to the annual reports of these companies.

Complex shareholding

The complex ownership structure of Paytm Payments Bank adds to the central bank’s concerns about related-party transactions, the people cited above added. While One97 Communications owns 49% of the bank, about 10% is owned through a joint venture between Sharma and One97. In addition to this, Sharma also controls One97 through his shareholding and directorship without being tagged as a promoter. The central bank also noted certain vulnerabilities in the IT systems of the lender in terms of cloud, data storage and data privacy, which were also flagged to the company on several occasions, but the regulator found lapses despite warnings.

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