paytm compliance shortcomings: Paytm management cites possible risk, compliance issues for RBI action

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In a hypergrowth environment, Paytm Payments Bank perhaps could not set up controls regarding compliance and technology in a manner that could have satisfied the banking regulator, top executives at Paytm said on Thursday.
“The challenge what we understand thus far is very clearly articulated…the bank in its conduct of a variety of elements — being a young bank in the beginning and then growing very large in size and scale — wasn’t able to satisfy the regulator of the controls, be it on technology or in compliance, to as much satisfaction that the regulator may be seeking,” Paytm chief operating officer Bhavesh Gupta said during a call with analysts.

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Also read | Paytm Payments Bank told to halt services by February-end

Paytm founder Vijay Shekhar Sharma, who also spoke, expressed confidence about overcoming the challenges posed by the Reserve Bank of India order asking the payments bank to stop all its services.

“This is an opportunity for us to come out better, stronger, abler and more capable for the regulator’s eye, and we are going to make sure that we will get out of this situation,” he said.

While the Paytm management and the RBI did not disclose the exact reason for taking such a stern action, industry insiders alluded to multiple possibilities. Some felt there could be issues around data security while others said there was probably too much overlap between Paytm Payments Bank and Paytm — the payments services platform.

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But Gupta said there was no data that Paytm was taking or getting from the bank in the past or at present.Also read | RBI action on Paytm indicates tough times ahead for fintech startups

“At any point in time a customer using a wallet or the UPI handle of the bank … the data would reside in the bank,” Gupta said. All the models for growth, lending and insurance were built on insights collected through the customer’s usage of the Paytm app, which is both legal and allowed by the regulator, he explained.

Paytm executives said it will have to undergo a major operational change by moving every consumer and merchant from Paytm Payments Bank to another lender, since the bank’s settlement accounts will stop functioning from February 29.

Sharma said he is already in talks with multiple banks for the switch and that this will get done within a month.

Paytm’s lending business will be impacted, and the company said it is in interactions with the lending partners.

Also read | Brokerage firms warn of ‘regulatory overhang’ around Paytm’s future

“We are working with partners to say that till the time we are able to work towards making operational changes, let’s pause new origination of loans for that period. And there will be some disruption. The Ebitda hit will include some impact coming from lending because we will not be originating loans for a couple of weeks,” Gupta said.

Paytm is expecting an annual hit of as much as Rs 300-500 crore on its Ebitda.

“The Rs 300-500 crore Ebitda assumes the worst-case situation, that is if we cannot migrate wallet users and wallet volumes become small. It does include the temporary impact on our lending business,” said Madhur Deora, group CFO, One 97 Communications.

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