FinTechRBI’s Regulatory Crackdown: Shockwaves in Fintech Sector

INTRODUCTION

The recent regulatory actions by the Reserve Bank of India (“RBI”) have significantly impacted Paytm Payments Bank Ltd (“PPBL”), imposing restrictions that effectively put a complete ban on the depositing and crediting operations of Paytm from February 29 onwards.

The RBI press release 2021-2022/1850, issued under section 35A of the Banking Regulation Act, 1949, prevents PPBL from undertaking any banking activities whatsoever, including deposits, credit transactions, wallet top ups, bill payments etc. These measures come as a response to persistent compliance issues and supervisory concerns identified by the RBI, leading to escalated intervention against PPBL.

The Paytm Payments Bank’s ban by the RBI has led to a staggering loss of Rs 26,000 crore in the stock market valuation of the company in just 10 days, leaving Paytm shares reeling. The RBI’s action comes as a result of  systemic non-compliances with Know Your Customer (“KYC”) norms and other rules by the FinTech giant.

Although the ban is only a temporary order, its ramifications are far reaching and merit going into the history behind the action and the larger precedent that the RBI is seeking to set for other FinTech companies in the sector.

PAYTM’S HISTORY WITH KYC AND COMPLIANCE NORMS

Paytm, a prominent player in India’s FinTech landscape, has faced previous challenges regarding regulatory compliance, particularly concerning KYC norms. Over the years, PPBL has encountered issues with adhering to regulatory guidelines, resulting in fines and regulatory directives from the RBI.

These incidents signify Paytm’s long standing struggle to maintain robust compliance frameworks and uphold regulatory standards since its inception in the form of One97 Communications (Parent Company).

The present ban comes as a result of stunning figures of fake accounts and absence of KYC norms for lakhs of accounts by PBBL, after close collaboration and an in-depth system audit of PBBL’s IT systems. The Financial Intelligence Unit (“FIU”) has presented a report to the RBI highlighting a significant breach in KYC protocols by the payments bank, where numerous accounts lack adequate KYC documentation, sparking worries about potential money laundering.

Actions warranting this decision include violations of licensing conditions, including breaches of day-end balances and non-compliance with KYC guidelines, issuing false submissions in the form final Certificate of Authorisation (“CoA”) and serious continued lapses in KYC and anti-money laundering (“AML”) practices.

Actions of non-compliance include:

1. Non-Identification of beneficial owners of entities on its platform through KYC-AML.
2. Delays in reporting cybersecurity incidents.
3. Submission of false documents.
4. A large number of fake and dormant accounts.
5. Lack of KYC resulting in one PAN card being used to run several PBBL accounts

These compliance lapses have not only affected the PBBL’s operations but have also led to reputational damage and financial repercussions for its parent company, One97 Communications.

CURRENT KYC GUIDELINES – CAUTION FOR OTHER PERSONAL FINANCE COMPANIES

The recent actions taken against PPBL serve as a cautionary tale for other personal finance based platforms or facilitators operating in India’s FinTech ecosystem like GooglePay and PhonePe. The stringent regulatory measures imposed by the RBI highlight the importance of strict adherence to KYC-AML guidelines and other regulatory requirements for all financial entities.

The recent initiative to suggest the setting up of a self-regulatory organization also shows intention from the side of RBI to evolve beneficial and advanced compliance. However, taking into account the habit of many online banking FinTech companies to flaunt KYC norms, this action can also be seen as a deterrent to other such non-compliers.

Thus, other personal finance companies must take heed and prioritize compliance with KYC norms and other regulatory standards. The RBI’s actions against Paytm underscore expectations placed on FinTech companies to maintain robust compliance frameworks and ensure adherence to regulatory guidelines.

Finance Minister Shri Nirmala Sitharaman is scheduled to convene a meeting with leaders of FinTech companies, accompanied by a Deputy Governor from the RBI and senior officials from relevant ministries, on February 26, 2024. The purpose of the meeting is to provide reassurance to the FinTech industry regarding the Government’s continued commitment to the sector which has been shaken by the sudden destructive action against PBBL.

AMLEGALS REMARKS

The regulatory actions against PBBL underscore the importance of robust compliance frameworks and adherence to KYC norms in the FinTech sector. It is imperative for all financial entities, especially those operating in the personal finance domain, to prioritize regulatory compliance to maintain trust and credibility in the market.

Neo-banking is seeing huge growth in India and has skyrocketed financial inclusion more than traditional banking ever could, however, with the possible merits come the bad actors that could use these new institutions to carry out large-scale frauds, money laundering etc.

Thus, the actions may be extreme but it re-institutes the seriousness of the present Government to take stern actions against continuous non-compliance, no matter how big or important the entity be.

-Team AMLEGALS assisted by Mr. Shaurya Pandey (Intern)

For any query or feedback, please feel free to get in touch with mridusha.guha@amlegals.com or liza.vanjani@amlegals.com.