The Reserve Bank of India (RBI), which encourages innovation in the banking sector, had warned about potential friction between innovative firms and regulatory bodies.
Fintech start-up Paytm, founded by Vijay Shekhar Sharma, is currently under the radar due to stringent restrictions imposed by the Reserve Bank of India (RBI). The RBI asked Paytm's banking unit Paytm Payments Bank to stop onboarding new customers immediately and shut its services after February 29.
But, once upon a time, Paytm was seen as leading the digital payments revolution in India. The RBI, which encourages innovation in the banking sector, had warned about potential friction between innovative firms and regulatory bodies.
In 2015, Paytm's founder Vijay Shekhar Sharma received an initial approval from RBI to set up a payments bank. However, despite getting their bank licenses, Vodafone's MPesa, Aditya Birla Money, and Tech Mahindra did not enter the business.
"We are taking a bet on payment banks. Paytm is an innovative firm and innovative firms are not always comfortable with the regulators. But we want to see where they push the system and so they have a payments bank licence," Rajan said in August 2016, a month before his tenure as the RBI governor ended in September 2016.
He further said: "For a number of years, we have been saying that a banking revolution is needed. The revolution is upon us today." Rajan also said while launching the Unified Payments Interface (UPI) that the easiest thing for a regulator to say is 'No' but it prevents the system from developing.
The former RBI boss further said that the approach instead should be to wait and watch in case of any new technology. "The easiest thing to say is 'No'. When there is uncertainty, then, it is easy to say No. But saying no prevents the system from developing. What should be the preferred thing to say is that wait, we should watch it and see how better the regulation can evolve," he said.
After Rajan's comments, Paytm responded on its Facebook page, saying: "We are truly humbled by the words of the RBI governor Raghuram Rajan, who believes in our innovation."
Paytm Payments Bank, a subsidiary of One97 Communications Limited (OCL), has been under RBI's regulatory scrutiny for the past two years due to non-compliance with Know Your Customer (KYC) norms. The recent curb by RBI, reportedly due to issues like violation of banking compliance norms, has led to a market value loss of over $2 billion for Paytm.
The company's share price dropped by 72% since its listing in November 2021. RBI's directive has unnerved merchants associated with Paytm, benefiting rival firms like PhonePe and Google Pay.
Despite the regulatory hurdles, Sharma assured that the Paytm app will continue to function and customers can withdraw or transfer funds from their Paytm wallet or Paytm Payments Bank until the available balance is exhausted.
