The downfall of Paytm has been significant, offering valuable lessons to be gleaned. Let's examine the situation from two perspectives: Paytm's internal operations and regulatory adherence. Ensuring compliance with regulations is paramount to maintaining safety and security in the business landscape. In the case of Paytm, regulatory bodies, particularly the Reserve Bank of India, are closely monitoring its operations. While some may question the intense scrutiny, it's crucial to consider the fate of the stakeholders who entrusted Paytm with their finances. The following are the reasons for RBI’s clampdown.
1. Non-KYC accounts- Existence of Lakhs of non-KYC (Know Your Customer) compliant accounts
2. Use of Single PAN Card- A single PAN was used to open multiple accounts in thousands of cases
3. Money Laundering concerns- The total value of transactions in some accounts ran into crores of rupees, which was beyond the regulatory limits in minimum KYC pre-paid instruments.
4. High number of Dormant Accounts- Out of the 35 crore Paytm wallet Accounts, 31 crore accounts were found to be dormant. These dormant accounts were used as mule accounts and for committing digital frauds.
5. Data Privacy Concerns- Paytm bank’s dependence on its parent entity one97 communications limited (OCL) for IT infrastructure raised data privacy concerns.
6. False Compliance Submissions- The compliances submitted by Paytm to the RBI were incomplete and frequently false.
The revelation that over 30 per cent of accounts lacked proper verification despite regular audits is concerning. This raises doubts about the safety of investors' funds. Regulators must compel Paytm to address these deficiencies promptly and without excuse. Rectifying these issues is imperative to restore trust and ensure the security of investors' capital.
Despite weathering the storm of the 2008 demonetisation period admirably, demonstrating resilience in challenging circumstances, Paytm faces the reality that business environments can evolve rapidly because of market dynamics and governmental regulations. Safeguarding investors' assets, especially during periods of uncertainty, takes precedence.
To instill confidence and foster investment, the Reserve Bank of India (RBI) ought to enact clear-cut regulations to safeguard investors' capital. These regulations should enhance transparency, bolster governmental oversight, and promote sound financial practices. Swift action by the RBI can fortify investment safety and stimulate economic growth, benefiting all stakeholders.
What Should be The Way Forward?
1. Open up more avenues of profit generation- RBI must increase deposit limits of payment banks. Also, a mechanism must be worked out to let these banks transfer the surplus money into the demand deposit accounts to the universal banks.
2. Facilitate Infrastructure sharing- RBI should take measures to facilitate infrastructure sharing among the traditional banks and Payment Bank. For ex- Payment bank desks in traditional bank branches.
3. Increased Internet connectivity- The internet connectivity in rural areas must be increased for the entry of new players in the payment bank market as the payment bank sector is dominated by telecom giants like Airtel and Jio which have their own network.
4. Increase the scope of operations- The payment bank should be allowed to offer their own mutual fund and insurance products to enhance their source of revenue generation and profitability.
5. Increase regulatory vigilance- The compliance of e-KYC and no frill accounts must be regularly undertaken by the RBI to prevent future crises like the Paytm crisis. The recommendations of the Anand Sinha committee must be implemented to ring-fence the banking operations of the payment bank from the ownership structure.
The ordeal serves as a poignant lesson for all parties involved. The swift governmental response in enacting new regulations is commendable. These regulations are designed to address prevailing issues and prevent their recurrence.
By implementing these measures, the government signals its commitment to fostering integrity, accountability, and security within the digital payment sector. This proactive approach will cultivate trust among prospective investors and stakeholders, helping to establish a more robust and dependable digital payment ecosystem.
Authored by Rajesh Shukla, chief strategist at National Intellectual Advisors (NIA)
