GS Paper III

News Excerpt

Recently, the RBI issued a press release instructing Paytm Payments Bank Ltd (PPBL) to stop onboarding new customers with immediate effect.

More details on the news:

•  As per RBI’s instruction, the existing customers were allowed to withdraw or utilise the balance in all their accounts but were not permitted to make additional deposit or credit transactions.
•  No other banking services can be carried out by PPBL after February 29, 2024.

Background of the RBI action

• On January 31, RBI imposed restrictions on PPBL under section 35A of Banking Regulation Act, 1949. RBI has directed PPBL to stop onboarding of new customers with immediate effect.
• The RBI's recent action follows a comprehensive system audit report and subsequent compliance validation report conducted by external auditors.
• The concern for non-compliance was first raised in 2022, leading to ongoing scrutiny.
• Paytm Payments Bank was restricted from adding customers in March 2022 due to similar concerns but continued doing business with existing customers.
• It had also been directed by the RBI in 2022 to appoint an Income Tax audit firm for a thorough system audit of its IT infrastructure.
• Nodal Account: It is a type of bank account that is opened by businesses and is used to hold the funds on behalf of its customers & vendors. It was introduced by the RBI to ensure that any business or intermediary does not withhold illegal money from the customers.

Concerns about RBI’s action

• Unclear Violations:The persistent non-compliances based on external audit reports, the specifics of these violations are not disclosed, leaving a crucial information gap.
• Lack of Formal Legal Order: The absence of a formal legal order outlining failures and justifications raises several questions.
• Compromised Rule of Law and Natural Justice: The principles of rule of law and natural justice, emphasizing equal treatment and fair procedures, appear compromised.
•  Wide-reaching Impact on Users: Prior to the action, PPBL had 30 million accounts and over 700,000 point-of-sale terminals. 
• There are more than 35 million UPI QR codes associated with PPBL and 300 million wallets. 
• On the Indian roads there are nearly 10 million FASTags of PPBL.
• Potential Panic Among Stakeholders:This lack of clarity could potentially cause panic among PPBL's account holders and impact millions of UPI QR codes, wallets, and FASTags.

Way forward:

• Revisiting Old Laws: It is time to revisit the old laws. This is part of India’s journey in building the institutions of a modern economy.
• Concept of SEBI:  In the case of Securities and Exchange Board of India (Sebi) the concept of a “speaking order” (with a rationale) came about as a result of two developments.
• A modern legislation, namely the Securities and Exchange Board of India Act, 1992 and the creation of relevant jurisprudence by the Securities Appellate Tribunal, which performs judicial oversight functions over Sebi.
• Need for banking regulation like SEBI: India needs a modern Banking Regulation Act like SEBI, one that would ensure that the rule of law and natural justice apply fully in regulatory enforcement matters, whenever authorities engage with financial firms.
• Justice without arbitrariness: In a democracy, financial firms need reassurance that justice will not be arbitrary.
• Ensuring Transparency and Accountability: Citizens, depositors, and users of wallets and QR codes have the right to know more about what went wrong at PPBL.