The Reserve Bank of India (RBI) cracked down on Paytm Payments Bank due to the fintech firm’s persistent non-compliance of the regulator’s norms despite repeated warnings.

The strict action was taken keeping in mind the gravity of the violation.

RBI Governor Shaktikanta Das told reporters that the central bank gives regulated entities adequate time to meet the regulatory requirements. It works with entities on a bilateral basis and imposes business restrictions or supervisory actions only when the entity does not take necessary actions.

Das did not want to comment on any particular entity.

"When constructive engagement doesn't work or when the regulated entity does not take effective action, we go for imposing business restrictions," the RBI Governor said.

The actions are "proportionate" to the gravity of the situation. They are driven by systemic stability or protection of depositor or customers' interests, he added.

Das said the RBI is a responsible regulator and would not have acted against a regulated entity if it had followed all the regulatory norms.

Das ruled out any systemic impact and said it was an issue with a specific institution. "Let me put the record straight on the Paytm issue. There is no worry about the entire system. It is an issue with a specific institution," he said.

He also said that it was not a case of regulatory deficiency but an issue of compliance. “The regulations are in place. It is not a case of regulatory deficiency. It is an issue of compliance with various parameters. I don't want to specify the details." 

Das emphasised that RBI supports innovation and technology in the financial sector. Earlier, following the RBI action against Paytm Payments Bank, several startup founders had raised concerns that such  regulatory measures could harm fintech startups.

Acknowledging that the RBI has received feedback from the wider public, Das said the central bank will be coming out with a set of FAQ (frequently asked questions) next week to assuage the concerns.

RBI Deputy Governor Swaminathan J said the actions against Paytm Payments Bank were taken due to persistent non-compliance of the regulator’s norms. 

“Such action is invariably preceded by months and sometimes years of bilateral engagement where we point out the deficiencies but also give time to take corrective action. As a regulator, it is incumbent upon us to protect the consumer," he told reporters during a post-policy briefing.

Swaminathan clarified that the action taken was not against the Paytm app but Paytm Payments Bank. 

Meanwhile, Paytm issued a statement saying that the Paytm app remains fully operational and its services were unaffected.  

“Paytm continues to lead in mobile payments innovation and we are accelerating our partnerships with banks to offer uninterrupted services. We assure our merchant partners that Paytm QR, Soundbox and card machines will continue to work as always," the company spokesperson stated.

On 31 January, the RBI ordered Paytm Payments Bank to stop accepting new deposits in its accounts after 29 February, citing supervisory concerns and non-compliance with rules.

According to media reports, hundreds of accounts created on Paytm Payments Bank without proper identification were one of the major reasons for the RBI to take punitive action. 

These accounts with inadequate Know-Your-Customer (KYC) conducted transactions worth crores of rupees on the platform, leading to fears of potential money laundering.

More than 1,000 users were reportedly having linked the same Permanent Account Number (PAN) to their accounts. The compliance submitted by the bank was found to be incorrect during verification processes conducted by both the RBI and auditors.