Shares of Paytm plunged 10% on Monday, their third straight session down, to hit a record low of 438.35 Indian rupees (or $5.28) after the RBI crackdown last week appeared to have a more far-reaching impact than what was previously expected.
Trading was halted after Paytm shares fell 10%, the artificial limit placed on its daily trading by local bourses. Although Paytm initially expected the RBI decision to have a maximum annual impact of $60 million on its business, the financial services firm has lost about $2.5 billion in market capitalization in three days, or more than 40% of its value as of Wednesday’s close. (Paytm’s market cap on Monday was $3.35 billion, below the $3.4 billion valuation at which it raised funds from Ant Financial in 2015 and well below its IPO valuation of $20 billion. More on the numbers here.)
The Reserve Bank of India (RBI) last week widened its restrictions on Paytm’s Payments Bank, which processes transactions for Paytm, barring it from offering many banking services, including accepting new deposits and credit transactions on its services. In response, Paytm initially said it would end operations with its subsidiary and seek partnership with other banks.
However, unlinking Paytm from the associated Paytm Payments Bank seems to create additional difficulties, both technical and perceptual.
Shares of ubiquitous financial services company Paytm, which is set to go public in 2021. (Images, data: Yahoo Finance)
TechCrunch first reported last week that the RBI is considering revoking the license of Paytm Payments Bank. In early 2018, when Paytm received its Payments Bank license — which allows the holder to offer customers a savings account of up to $2,400 — it had to surrender its PPI license, the license required to run its wallet business.
Paytm Payments Bank houses more than 330 million wallet customers and Paytm cannot move them to a different banking partner until the central bank returns its PPI license to the company. And it is not clear whether the central bank – which was uncharacteristic strong wording in his sentence to Paytm – will make any concessions by the deadline (February 29). Indian newspaper Hindu Businessline reported on Sunday that Paytm is trying to sell the wallet business.
And that’s not the only other license at stake. As a fintech investor based in Bengaluru Osborne Saldanha adds:
The obvious, immediate impact is that Paytm’s payments banking operations will be halted until the RBI issues further instructions. However, it is not clear whether the RBI will ever allow Paytm to resume payments banking even after complying with the RBI’s requirements, as the notification mentions any remedial clauses. It is entirely possible that the RBI will cancel Paytm’s payments banking license altogether. If this happens bear with me as I can’t decipher definitively but it looks like Paytm may not even have a payment aggregation license as the payment aggregation license would be in the payments bank license and Paytm’s application for an aggregation program payments permission was returned by RBI.
In his announcement last week. the RBI said Paytm’s “persistent” non-compliance with an earlier order – from March 2022, when the RBI ordered Paytm to stop adding customers to Payments Bank – raises supervisory concerns and warrants further action. The RBI said an audit found instances of non-compliance, but did not go into details.
Local media reported last week that Paytm Payments Bank was riddled with issues such as money laundering and that the Enforcement Directorate of India’s crime-fighting agency was investigating the company. Paytm turned down (PDF) that the ED was conducting any investigation, and in a town hall with employees on Saturday, senior Paytm executives assured that the issues reported in the media were “old” and had been fixed “a long time ago,” TechCrunch reported for the first time.
As we try to understand the full extent of the potential damage from the RBI’s initial decision on Paytm, the company has already started hemorrhaging customers and merchants. As Macquarie analyst Suresh Ganapathy pointed out in an analyst call last week, many Paytm customers are already of the belief that Paytm is doomed.
“We anticipate this will reduce Paytm’s consumer brand credibility which could lead to market share losses in areas previously dominated by Paytm,” JPMorgan analysts said in a note last week.
The ongoing episode with Paytm is also shaking investor confidence in the Indian fintech market. The RBI has introduced a series of regulatory changes – or clarifications – over the past three years, and fintech as a sector was already becoming hostile to many VCs.
“I believe this action against Paytm is precedent-setting, harsh and affects the broader financial services ecosystem in India. I don’t remember the last time the RBI canceled a bank’s license on grounds other than adequate capital requirements,” Saldanha added.
Bipin Singh, co-founder of financial services firm MobiKwik, defended RBI’s rationale: “Having worked closely with the regulator for the last decade or so, I can confidently say that RBI is neither anti-innovation nor anti-fintechs. If it was, we wouldn’t have the huge fintech ecosystem in India today. Compliance, however, is non-negotiable,” he said he tweeted.
