Paytm on Thursday said it would stop working with its subsidiary Paytm Payments Bank and accelerate partnership plans with other banks, after India’s central bank barred Paytm Payments Bank from conducting almost all of its business activities over supervisory concerns.
The Noida-based financial services company said it expects its loan distribution, insurance distribution and stock broking operations to not be affected by the Reserve Bank of India (RBI) directives, as these companies have no relation to Paytm Payments Bank. The payment bank includes 330 million wallet accounts and 30 million bank accounts.
Paytm shares fell 20% within minutes of the market opening on Thursday, triggering a blackout.
The Reserve Bank of India (RBI) issued tough new restrictions on Wednesday on Paytm Payments Bank, which processes transactions for Paytm, effectively ending the bank’s operations by barring it from offering several banking services, including accepting new deposits and enabling credit transactions. . It also asked Paytm and Paytm Payments Bank to terminate their nodal accounts. Paytm said it will move its node to other banks.
“Paytm’s payment gateway business (online merchants) will continue to provide payment solutions to its existing merchants,” OCL said [Paytm’s] Offline merchant payment network offerings such as Paytm QR, Paytm Soundbox and Paytm Card Machine will continue as usual, as they can also onboard new offline merchants as well.
Paytm said it expects between $36 million to $60 million of annual earnings before interest, tax, depreciation and amortization (EBITDA) to be wiped out in a “worst case scenario”. The next stage is to continue expanding payments and financial services “only in partnerships with other banks,” she said.
Some analysts and other industry executives to caution Paytm’s path to convincing banks to work with it may not be very easy. “Should lenders take more caution in their partnerships with Paytm following the RBI action on PPBL, coupled with the recently announced curtailment of small ticket loans, we estimate a negative revenue impact of 40-45% on Paytm, with the implied value per Goldman analysts wrote. Saks in a note on Thursday: “Rs 450 stock, or 41% decline from current share price.”
One97 Communications, Paytm’s parent company, holds a 49% stake in Payments Bank while the rest of the shares are owned by Paytm founder Vijay Shekhar Sharma. A payments bank license allows the holder to provide a number of banking services, although there are some restrictions. The Reserve Bank of India gave final approval to Paytm’s payments bank in early 2017.
Wednesday’s crackdown comes after the Reserve Bank of India ordered Paytm Payments Bank to stop accepting new customers in 2022, restrictions it still maintains. The RBI said the audit found “persistent” non-compliance and “continuing material supervisory concerns”, warranting further action.
“We have seen the RBI taking about 15 months to undo its ban on the digital business activities of the largest private sector bank. However, in this case since the first ban (in March 2022) on onboarding of new customers (almost 22 months have passed), it has RBI conducted a comprehensive IT audit and continued to identify instances of non-compliance, which in our view indicates that these lapses are “entirely material,” Macquarie analysts wrote in a note.
“Accordingly, we do not see any near-term solution to these problems and this effectively means, in our view, that the RBI is indirectly canceling the PPI (prepaid instrument) license for Paytm.”
“Our main concern, unlike previous guidance, is that the RBI has not yet issued any comments on potential steps towards resolution, which suggests to us that the guidance could remain in place for the foreseeable future,” Goldman Sachs analysts added.
The RBI’s order could have a 20-30% direct impact on EBITDA, and “the reputational impact on lending partnerships could be further impacted by 20-25%,” Jefferies said in a note on Thursday. This prompts us to reduce EBITDA for FY25-26 by 45%, which will also delay profitability.