On Wednesday, the Reserve Bank of India dealt a severe blow to Paytm Payments Bank, imposing sweeping restrictions that prohibited the acceptance of fresh deposits and credit transactions, effective 29 February.

"No further deposits or credit transactions or top ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, NCMC cards, etc. after February 29, 2024, other than any interest, cashbacks, or refunds which may be credited anytime," the RBI notification stated.

RBI’s notification said that the latest measures came after “the Comprehensive System Audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action”.

The action comes after the RBI barred the payments bank from onboarding new customers in March 2022. According to experts cited by Moneycontrol, this was reportedly due to violation of norms related to know your customer (KYC), data storage, data privacy, outsourcing of data and more.

Clarifying the scope of restrictions, the RBI has permitted customers to withdraw or use balances from their accounts—savings bank accounts, current accounts, prepaid instruments, FASTags, National Common Mobility Cards, etc.—without any constraints, up to their available balance.

However, the central bank categorically stipulated that “no other banking services, other than those referred in (ii) above, like fund transfers (irrespective of name and nature of services like AEPS, IMPS, etc.), BBPOU and UPI facility should be provided by the bank after February 29, 2024”.

Adding to Paytm’s woes, the RBI instructed the termination of nodal accounts held by its parent company, One97 Communications and Paytm Payments Services, latest by end of February. A nodal account is a special purpose account created for receiving funds from participating banks and remitting to specific merchants.

Additionally, the payments bank was directed to settle all pipeline transactions and nodal accounts—in respect of all transactions initiated on or before 29 February—by 15 March and no further transactions would be permitted thereafter.

The fintech company has been flagged in recent months on multiple occasions by regulatory bodies over reported non-compliance.

In October 2023, the RBI imposed a fine of Rs 5.39 crore on the payments bank. The central bank had then noted that the company failed to comply with its guidelines. A failure to report a cybersecurity incident on time is one of multiple incidents where the RBI guidelines were not followed.

Last week, the Times of India reported that Indian Highways Management Company—an arm of the National Highways Authority of India—barred Paytm from issuing new FASTags due to non-compliance with various service level agreements.

The latest regulatory action also comes on the heels of Paytm scaling down Paytm Postpaid last month, its buy-now-pay-later offering. The company decided to slow down its small-ticket postpaid loans and instead focus on big-ticket personal loans and merchant loans.

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