News Excerpt: 

The Reserve Bank of India (RBI) has barred Paytm Payments Bank from accepting fresh deposits and carrying out further transactions.

About the Payment Banks:

• It is like any other bank, but operating on a smaller scale without involving any credit risk. 
• It can carry out most banking operations but can’t advance loans or issue credit cards. 
• It can accept demand deposits (up to Rs 1 lakh), offer remittance services, mobile payments/transfers/purchases, and other banking services like ATM/debit cards, net banking, and third-party fund transfers.
• The main objective of payment banks is to widen the spread of payment and financial services to small businesses, low-income households, and migrant labor workforce in a secure technology-driven environment.
• In September 2013, the Reserve Bank of India constituted a committee headed by Dr Nachiket Mor to study 'Comprehensive financial services for small businesses and low-income households'. 
• The objective of the committee was to propose measures for achieving financial inclusion and increased access to financial services.

What RBI has said:

• The central bank has barred Paytm Payments Bank from accepting fresh deposits and carrying out transactions, citing “persistent non-compliance” and “material supervisory concerns in the bank, warranting further supervisory action.”
• The RBI has also said that no further deposits or credit transactions or top-ups will be allowed in customer accounts, prepaid instruments, wallets, FASTags, National Common Mobility Card cards, etc, after February 29, other than any interest, cashback, or refunds that may be credited any time. 
• The regulator has issued the directions under Section 35A of the Banking Regulation Act.
• This Act empowers RBI to prevent affairs of any bank seen as detrimental to the interests of depositors and secure proper management in the bank. 

The effects of the order: According to the data from the National Payments Corporation of India(NPCI), Paytm Payments Bank is ranked third among all UPI-based applications (apps) regarding the volume and value of transactions. These disciplinary measures are seen as unprecedented for the financial services industry and will affect the app’s users as well as the wider merchant community that uses the Paytm network for payment processing, wage disbursals, and other quasi-banking functions.

• Many small enterprises use Paytm for salary payments and this will affect their operations.
• Services related to the stock market and mutual funds fall under the purview of the market regulator SEBI and are not covered by the RBI's order.
• No risk is associated with loans obtained through Paytm. These loans are facilitated by third-party lenders, and borrowers are required to continue their repayments.

Thus, these actions of the RBI can influence market perception of the company's long-term prospects and valuation. The regulator's intervention underscores ongoing governance and compliance challenges for other companies in the same industry as well.