The Financial Intelligence Unit-India has slapped a ₹5.49 crore penalty on Paytm Payments Bank Limited (PPBL) for violations of the Prevention of Money Laundering Act (PMLA).
| Photo Credit: GIRI KVS

The Financial Intelligence Unit-India has slapped a ₹5.49 crore penalty on Paytm Payments Bank Limited (PPBL) for violations of the Prevention of Money Laundering Act (PMLA), after finding substantial proof of money generated from illegal activity being routed through accounts held by some entities with the bank. 

The FIU-IND had initiated a review of the PPBL’s operations after receiving “specific information” from law enforcement agencies about a few entities and their network of businesses engaging in “a number of illegal acts, including organising and facilitating online gambling”, the agency said in a statement on March 1 about the penalty order issued on February 15. 

The Paytm Payments Bank debacle | Explained

“Further, the money generated from these illegal operations, i.e. proceeds of crime were routed and channelled through bank accounts maintained by these entities with the Paytm Payments Bank Ltd,” it said.

Documents pertaining to such activity were scrutinised and a Show Cause Notice was served on the bank for violating multiple regulations laid down in the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. These included breaches of the rules pertaining to safeguards to be adopted for Anti-Money Laundering, Counter-Terrorism Financing and Know Your Customer or KYC processes for beneficiary accounts and payout services.

“After considering the written and oral submissions of the Paytm Payments Bank Ltd, Director, FIU-IND, based on the voluminous material available on record, found that the charges against Paytm were substantiated,” the agency said, adding that a monetary penalty of ₹5.49 crore was imposed in an order passed under Section 13 of the PMLA.

Paytm Payments Bank meltdown, its meaning | Explained

The FIU is India’s national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions to enforcement agencies and its foreign counterparts.

A PPBL spokesperson said, “The penalty pertains to issues within a business segment that was discontinued two years ago. Following that period, we have enhanced our monitoring systems and reporting mechanisms to the Financial Intelligence Unit (FIU).”

The Financial Intelligence Unit-India has slapped a ₹5.49 crore penalty on Paytm Payments Bank Limited (PPBL) for violations of the Prevention of Money Laundering Act (PMLA).
| Photo Credit: GIRI KVS

The Financial Intelligence Unit-India under the Union Finance Ministry has slapped a ₹5.49 crore penalty on Paytm Payments Bank Limited (PPBL) for violations of the Prevention of Money Laundering Act (PMLA), after finding substantial proof of money generated from illegal activity being routed through accounts held by some entities with the bank. 

The FIU-IND had initiated a review of the PPBL’s operations after receiving “specific information” from law enforcement agencies about a few entities and their network of businesses engaging in “a number of illegal acts, including organising and facilitating online gambling”, the agency said in a statement on Friday about the penalty order issued on March 1, 2024.

The Paytm Payments Bank debacle | Explained

“Further, the money generated from these illegal operations, i.e. proceeds of crime were routed and channelled through bank accounts maintained by these entities with the Paytm Payments Bank Ltd,” it said.

Documents pertaining to such activity were scrutinised and a Show Cause Notice was served on the bank for violating multiple regulations laid down in the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. These included breaches of the rules pertaining to safeguards to be adopted for Anti-Money Laundering, Counter-Terrorism Financing and Know Your Customer or KYC processes for beneficiary accounts and payout services.

“After considering the written and oral submissions of the Paytm Payments Bank Ltd, Director, FIU-IND, based on the voluminous material available on record, found that the charges against Paytm were substantiated,” the agency said, adding that a monetary penalty of ₹5.49 crore was imposed in an order passed under Section 13 of the PMLA.

Paytm Payments Bank meltdown, its meaning | Explained

A PPBL spokesperson said, “The penalty pertains to issues within a business segment that was discontinued two years ago. Following that period, we have enhanced our monitoring systems and reporting mechanisms to the Financial Intelligence Unit (FIU).”

The FIU is India’s national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions to enforcement agencies and its foreign counterparts.

Reserve Bank of India Governor Shaktikanta Das addresses a press conference after a customary post-budget meeting with the Central Board of Directors of Reserve Bank of India, in New Delhi, Monday, Feb. 12, 2024.
| Photo Credit: PTI

Reserve Bank of India Governor Shaktikanta Das ruled out any review of the central bank’s action against Paytm Payments Bank (PPBL) on February 12, saying the decision was taken after a comprehensive assessment of the functioning of the lender.

In a major action against PPBL, the RBI directed it to stop accepting deposits or top-ups in any customer accounts, wallets, FASTags and other instruments after February 29 on January 31.

Also Read: Paytm Payments Bank meltdown, its meaning | Explained

“At the moment let me say very clearly there is no review of this [PPBL] decision. If your are expecting a review of the decision, let me very clearly say there is [going to be] no review of the decision,” Mr. Das said at a press conference after the 606th meeting of the Central Board of Directors of the Reserve Bank of India. The meeting was addressed by Finance Minister Nirmala Sitharaman.

The Governor said any decision against entities regulated by the RBI is taken after a comprehensive assessment. While emphasising that RBI is supportive of the fintech sector, Mr. Das said it is also committed to protect the interest of customers as well as ensure financial stability.

The RBI is expected to soon issue a set of FAQs (Frequently Asked Questions) on the Paytm matter this week.

RBI’s action against Paytm Payments Bank

While announcing the action against PPBL, the RBI had said the direction follows persistent non-compliances and continued material supervisory concerns.

Earlier on March 11, 2022, the RBI had barred PPBL from onboarding new customers with immediate effect.

In its latest action, RBI has asked the Paytm Payments Bank not to take deposits, credit transactions, top-ups in any customer accounts, prepaid instruments, wallets, FASTags, and NCMC cards, among others after February 29, 2024. However, the central bank has allowed credit of interest, cashbacks, or refunds even beyond February 29.

Further, withdrawal or utilisation of balances by PPBL customers from their accounts, including savings bank accounts, current accounts, prepaid instruments, FASTags, and National Common Mobility Cards are permitted without any restrictions, up to their available balance.

The RBI also directed termination of the ‘nodal accounts’ of One97 Communications Ltd. One97 Communications, which owns Paytm brand, holds a 49 per cent stake in Paytm Payments Bank Limited, but classifies it as an associate of the company and not as a subsidiary.

Son of a schoolteacher from Aligarh district in Uttar Pradesh, Vijay Shekhar Sharma was enamoured by Jack Ma-run Alibaba’s focus on smartphones rather than desktop computers, when he built a digital payments company that would let Indians pay for vegetables, pay utility bills or buy cinema tickets using their mobile phones.

Mr. Sharma, the poster boy of India’s fintech boom, also set out to build an Alipay-like mobile marketplace to go alongside the payments business, allowing businesses to sell goods from matchbox to iPhones online.

With fame came a set of controversies for arguably the most high-profile of a wave of Indian tech entrepreneurs. But none like the one now. The current crisis where the Reserve Bank of India (RBI) has ordered Paytm Payments Bank to halt most of its business, is an existential one.

Here is a breakdown of Paytm Payments Bank crisis

What was the recent RBI action against Paytm Payments bank all about?

The RBI last week ordered Paytm Payments Bank Ltd, a restricted bank that can take deposits but cannot lend, to not take any further deposits or conduct credit transactions or carry out top-ups on any customers accounts, prepaid instruments, wallets, cards for paying road tolls after February 29.

Paytm Wallet customers can use money till the time their balance is exhausted. They cannot add money after February 29. And in case the RBI does not relent, top-up for Paytm Wallet will stop and transactions through it would no longer can be carried.

What is Paytm Payments Bank, and who owns it?

Paytm Payments Bank Limited (PPBL) is an associate of One97 Communications Limited (OCL). One97 Communications holds 49% of the paid-up share capital (directly and through its subsidiary) of PPBL. Mr. Sharma has a 51% stake in the bank.

PPBL commenced operations as a payments bank with effect from May 23, 2017. The bank offered digital banking, including savings accounts, current accounts, fixed deposits with partner banks, and balance in wallets, UPI, and FASTag, among other services.

Paytm Wallet, which comes under PPBL, leads the segment. As per the RBI’s provisional data for December 2023, Paytm Wallet users carried out 24.72 crore transactions worth over ₹8,000 crore for purchase of goods and services while 2.07 crore transactions were carried out for transferring over ₹5,900 crore.

What happened and what it means for customers?

The RBI directed the Paytm Payments Bank to stop accepting deposits or top-ups in customer accounts, wallets, FASTags and other instruments after February 29 on January 31. Withdrawal or utilisation of balances by its customers from their accounts, including savings bank accounts, current accounts, prepaid instruments, FASTags, National Common Mobility Cards, are to be permitted without any restrictions, up to their available balance.

Paytm Wallet users can continue to carry on transactions till February 29. However, after February 29, they will be able to use their existing balance till the time it is exhausted but not add any money to their account.

The same rule is applicable on PPBL accounts, Paytm Wallet-linked services like FASTag, National Common Mobility Card that are used for travel in metro and other public transport.

What are the alternatives for users?

There are over 20 banks and non-banking entities that offer wallet service like Mobikwik, PhonePe, SBI, ICICI Bank, HDFC, Amazon Pay etc.

Similarly, there are 37 banks comprising all the known public and private sector banks like SBI, HDFC, ICICI, IDFC, Airtel Payments Bank which are authorised to provide FASTag. Customers can recharge FASTag online using their banks mobile banking, internet banking or third party apps like Google Pay, PhonePe etc.

Why did Paytm Payments Bank come under RBI lens?

The banking regulator had been frequently flagging off issues. According to sources, money laundering concerns and questionable dealings of hundreds of crores of rupees between popular wallet Paytm and its lesser-known banking arm had led RBI to clamp down on entities run by Mr. Sharma.

Sources further said that PPBL had lakhs of non-KYC (Know Your Customer) compliant accounts and in thousands of cases single PANs were used for opening multiple accounts. There were instances of the total value of transactions — running into crores, much beyond regulatory limits in minimum KYC pre-paid instruments raising money laundering concerns, sources said.

What has been the company’s response to the RBI’s Jan 31 action?

While users have the option to switch to other wallets, and FASTag services etc being provided by other vendors, Paytm management has said that PPBL is in discussion with the RBI to comply with their direction for continuing the business.

Paytm has said that its financial services such as loan distribution, insurance distribution and equity broking are not in any way related to PPBL and are expected to be unaffected. The company’s offline merchant payment network offerings like Paytm QR, Paytm Soundbox, Paytm Card Machine will continue as usual, where it can onboard new offline merchants as well.

Paytm sees an impact of ₹300-500 crore on its annual operational profit.

How has One97 Communications’ shares responded?

Following the RBI’s crackdown, shares of One97 Communications Ltd, which owns Paytm brand, slumped 40% in the last two days. The stock tanked 20% to ₹487.05, its lowest trading permissible limit for the day, on the BSE on Feb. 2. In two days, the company’s market capitalisation eroded by ₹17,378.41 crore ₹Rs 30,931.59 crore.