Yesterday, the Reserve bank of India (RBI) imposed further restrictions on Paytm Payments Bank, directing it to cease all deposits and credit transactions after February 29, 2024. Now, to safeguard business and arrest user departure from the core platform, Paytm has announced that it would terminate with its associate Paytm Payments Bank. While the move would have far-reaching consequences for the Paytm ecosystem, it was a necessity considering RBI’s complete ban on the payments bank business. Paytm said it would partner with other banks to continue providing service, though one can only imagine how one-sided those associations could be.
To provide more context, the RBI implemented a series of stringent measures affecting Paytm Payments Bank, a subsidiary of One97 Communications, the parent firm of Paytm. These measures, set to be effective from February 29, include a comprehensive prohibition on accepting fresh deposits and facilitating credit transactions. Additionally, the RBI mandated the termination of nodal accounts associated with both Paytm and Paytm Payments Bank. Paytm Payments Bank, with a substantial user base of 330 million wallet accounts and 30 million bank accounts, is thus poised to witness a cessation of operations following the RBI’s directives
In light of the regulatory actions, Paytm has officially communicated that certain segments of its business remain unaffected by the RBI’s directives. The company assured stakeholders that its loan distribution, insurance distribution, and equity broking operations, as well as services like user deposits in their savings accounts, wallets, FASTags and NCMC (National Common Mobility Card) accounts, will continue operations without interruption. In a statement, the Indian fintech major revealed that it will be taking steps immediately to be compliant with the directions of the RBI. For now, Paytm and One 97 Communications (the parent company of Paytm) will cease working with Paytm Payments Bank and start working only with other banks.
Recognizing the potential financial fallout, Paytm further estimates an annual reduction in EBITDA ranging from $36 million (₹3 billion approximately) to $60 million. Analysts, however, have expressed reservations about Paytm’s ability to swiftly establish partnerships with other banks in the wake of the regulatory action. Goldman Sachs analysts, in particular, caution that lenders might adopt a cautious approach, potentially resulting in a significant negative impact on Paytm’s revenue.
The recent regulatory intervention by the RBI is not an isolated incident in Paytm’s operational history. Last year, the RBI directed Paytm Payments Bank to halt the onboarding of new customers, a restriction that remains in force. The ramifications of the recent regulatory developments extend beyond the operational sphere, directly impacting Vijay Shekhar Sharma, the charismatic founder of Paytm. The company, which went public in 2021 with backing from SoftBank Group Corp., is facing challenges in proving its profitability amidst regulatory scrutiny and concerns over its Chinese backing. Jefferies analysts have estimated a direct impact of 20-30% on EBITDA and an additional 20-25% due to potential reputational damage to lending partnerships. The market has responded swiftly, with Jefferies adjusting its price target for Paytm shares. So far, the announcement has resulted in a steep drop of 20% in the price of Paytm shares, which are priced at ₹609.00 as of Thursday, February 1. Fingers remain crossed on how investors will react, though chances are that many may choose to dump the stock.
