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Why has RBI Crackdown on Paytm Payment Bank

Paytm on Friday probably faced its biggest regulatory crackdown since it got listed on the bourses last year. India’s Central Bank, Reserve Bank of India, issued a press release on Friday announcing that it has directed Paytm Payments Bank to stop onboarding new customers from immediate effect. RBI has cited ‘material supervisory’ concerns observed in the bank as the main reason for issuing this directive against Paytm’s banking unit.

The banking regulatory has also asked Paytm Payment Bank to hire an audit firm and conduct an comprehensive audit of its IT system.

According to reports, RBI has already said that it will take steps to revoke the ban only after reviewing Paytm Bank’s IT audit report.

Experts are of the view that it is highly unlikely that RBI must have not sought prior explanation from Paytm Payments Bank over IT discrepancies and its punitive action may have resulted due to latter’s unsatisfactory response.

RBI’s crackdown on Paytm Payment Bank clearly implies that the central bank has concerns about critical matters like data privacy, data storage KYC etc. Notably, the central bank has already made its mandatory for fintech MNCs to have a local data storage in India. In this context, it is worth noting that Alibaba, Softbank and several international VCs still have stake in Paytm.

This regulatory crackdown may have some short term impact on Paytm Bank’s growth plans. On immediate note, RBI’s crackdown will most certainly have negative effect on Paytm’s share price when trading resumes on Monday.

Paytm share price has been on a freefall ever since it got listed on the bourses last year. Listed at an issue price of Rs 2100, today its stocks are trading at paltry price of Rs 776.

However, it must be noted that RBI has equally issued similar directives against established banks including India’s largest private sector bank, HDFC Bank.

In December 2020, RBI barred HDFC from launching new digital products and services including new credit cards unless the bank addresses its recurring IT related issues.

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