Paytm Payments Bank crisis: Vijay Shekhar Sharma must move fast; here's why

Paytm founder Vijay Shekhar Sharma, a Bollywood buff, finds himself confronting the kind of existential crisis often found in cinema.

This is because the Reserve Bank of India (RBI) has asked the group’s Paytm Payments Bank (PPBL) to halt most of its activities—like taking more deposits, conducting credit transactions, and allowing customers to top up their accounts—after February 29 due to persistent non-compliance.

One97 Communications (OCL), the parent company of Paytm, owns 49% equity in PPBL, with Sharma, the majority owner, holding the rest. RBI allows payments banks, under its differentiated licensing scheme, to accept current and savings deposits and offer payments products, but no lending is permitted.

Besides, both entities, OCL and PPBL, share close business linkages. The parent company’s Paytm app offers various payments instruments from Paytm Payments Bank, such as Wallet, Paytm UPI, FASTag, and fixed deposits.

As RBI Governor Shaktikanta Das pointed out after the recent meeting of the central bank’s monetary policy committee, lapses associated with Paytm had been pointed out multiple times. He said when constructive engagement doesn’t work or when the regulated entity does not take effective action, RBI imposes business restrictions. “Paytm should have corrected these issues two years ago, when RBI directed PPBL to stop onboarding new customers and appoint an IT audit firm to conduct a comprehensive system audit of its IT systems,” says a banker.

Santanu Agarwal, Deputy Managing Director at fintech firm Paisalo Digital, says maintaining regulatory compliance in the ever-evolving financial landscape is vital. “By proactively strategising and adapting to regulatory shifts, NBFCs (non-banking finance companies) can establish a resilient framework to ensure adherence to evolving standards,” says Agarwal. The immediate upshot seems to be that Sharma’s ambitions of running a full-fledged bank have been stalled.

Will RBI step in to supersede the board after February 29? The Paytm management, led by Sharma, maintains that there is a clear separation between OCL and PPBL, with both entities operating independently to comply with banking governance standards. The bank earned revenues of `3,285 crore and profits of `15 crore in FY23. It has total assets of `9,843 crore and deposits of `3,285 crore.

But it’s worth noting that Sharma serves as the part-time Chairman of PPBL, while Bhavesh Gupta, the current President and COO of Paytm, holds the position of Director on the bank’s board. Similarly, Srinivas Yanamandra, Group Head of Regulatory Affairs & Policy at the parent company, also serves as a Director at the bank. Two independent directors have already jumped ship.

OCL, the holding company, is already facing a margin hit of `300-500 crore on its annual Ebitda. The company will find it challenging to negotiate favourable terms with other banks when it begins shifting PPBL’s customers. Madhur Deora, OCL’s CFO and Additional Whole-time Director, expressed confidence recently, stating, “Over time, we will be able to significantly offset this impact.”

Will investors buy this? OCL’s stock price is already on a downward trend. It has plunged 41% since RBI’s action. The stock, which is trading around `428 apiece on February 12 with a market valuation of around `27,000 crore, experienced a turbulent beginning after its IPO, in which shares were priced in the `2,080-2,150 range.

Sharma will be concerned about institutional investors. While domestic institutions, especially mutual funds, hold around 5%, foreign institutions own a large chunk, at 45%. “Some could exit as the future looks bleak. There is also the possibility of a merger with a bank or NBFC,” says a market insider. The market was abuzz with rumours of Jio Financial acquiring Paytm’s wallet business. But both OCL and Jio Financial have denied this.

OCL is now preparing for a future beyond PPBL. It has set up a three-member advisory committee headed by former Sebi chairman

M. Damodaran to strengthen corporate governance.

OCL, the payments aggregator, could acquire both online and offline merchants. Operationally, the arrangement for sharing incentives in person-to-merchant (P2M) transactions will now have to be renegotiated with new banks. “As a payments aggregator for online and offline merchants, OCL has been collaborating with various banks over the past two years, with PPBL being one of the primary partners,” says Paytm. The challenge now is transitioning existing merchants, especially offline vendors, from PPBL to another bank.

Paytm President and COO Gupta said recently that discussions would also be held with the regulators and the National Payments Corporation of India. Sharma told investors that the company is actively reducing its reliance on PPBL, though significant dependence exists. “It’s important to highlight that these relationships are primarily payments-related, implying that all banks possess the necessary technology and capabilities,” he explained. In addition, OCL is transferring nodal accounts—special putpose accounts created for receiving money from banks—to other large commercial banks. These are highly lucrative due to the substantial funds passing through them.

Sharma and his team are racing against the clock. They need to move fast to address RBI’s concerns.

@anandadhikari