On Friday evening, the Central Bank of India, Reserve Bank of India (RBI) issued a directive against Paytm Payments Bank Ltd to stop, with immediate effect, the onboarding of new customers.
Why RBI issued a directive against Paytm Payment Bank:
- On Friday, 11th March 2022, Reserve Bank of India, in the exercise of its powers, inter alia, under section 35A of the Banking Regulation Act, 1949, directed Paytm Payments Bank Ltd to stop, with immediate effect, onboarding of new customers.
- The bank has also been directed to appoint an IT audit firm to conduct a comprehensive System Audit of its IT system. Onboarding of new customers by Paytm Payments Bank Ltd will be subject to specific permission to be granted by RBI after reviewing the report of the IT auditors.
- This action is based on certain material supervisory concerns observed in the bank.
- Until the raised issue is not being addressed, till then Paytm Payments Bank will not be able to welcome any new customers.
- Paytm Payments Bank is having a total of 6 Cr. active customers, while, Paytm’s product Paytm Wallet is having 35 Cr.-36 Cr. customers.
- The company aspires to take the total count of customers to around 50 Cr., where the monthly run rate of the company acquiring new customers is around 4 Lakh.
- There were rumors that there were data leaks to a Chinese firm and there was a violation of rules by allowing data to flow to servers abroad and didn’t properly verify its customers.
- As per the news report, Over the next few days, Paytm Payments Bank will submit to the regulator for its approval several names as potential audit candidates, and the regulator may finalize the terms of reference based on its findings that include a series of lapses in meeting the Know Your Customer (KYC) norms.
Impact of Ban on Paytm Payments Bank:
- There have been negative reports by and sell calls by various brokerage houses amid this ban on Paytm Payments Bank.
- Interestingly, here Macquarie, which has given the downside target of Rs. 1,200 since the listing of scrip, then Rs. 900 in January 2022, and Rs. 700 in February 2022 has said that it does not see any substantial impact on the business due to this ban on account of a large customer base. However, the firm still stands on its Underperform rating to the stock.
About Paytm Payments Bank:
- Paytm Payments Bank is the country’s largest digital bank with over 5.8 Cr. account holders. It is a joint venture between Vijay Shekhar Sharma, Founder & CEO of Paytm, and One97 Communications Limited.
- In this venture, Vijay Shekhar Sharma owns 51% stake and One97 Communications holds the rest stake i.e., 49%.
- The Paytm Payments Bank is a profitable venture of Paytm, where the firm has recorded a net profit of Rs. 37 Cr. in FY21, and Rs. 29 Cr. in FY20.
- As an impact of the directive of RBI, the market capitalization of Paytm falls by Rs. 6,400 Cr. as the stock tanked by 13% on Monday
What Should Investors Do?
The news of supervisory concerns over the profitable venture of Paytm is quite negative news for Paytm and its investors. Looking at the current developing scenario over Paytm, a conservative and moderate investor should be a little cautious here.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.