Paytm shares extend decline after RBI ban on adding new customers in Payments Bank

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Paytm shares extended decline on Tuesday, after the RBI directed Paytm Payments Bank Ltd (PPBL) to stop onboarding new customers with immediate effect on Friday. The shares were down more than 9% to hit a new 52-week low of Rs 608 on NSE. The stock is now down more than 71% from its IPO price of Rs 2,150. On Friday evening, the RBI barred Paytm Payments Bank from adding new customers after certain material supervisory concerns were observed in the bank. The ban sent the stock tumbling more than 12% on Monday. Since, then the shares have lost more than 20%. 

Below are the details of the ban:

What rules did Paytm violate:

As per the RBI directive, “all system providers need to ensure that the entire data relating to payment systems operated by them are stored in a system only in India. This data should include the full end-to-end transaction details, information collected or carried or processed as part of the message or payment instruction. For the foreign leg of the transaction, if any, the data can also be stored in the foreign country, if required”.

Paytm Payments Bank has violated India’s rules by allowing data to flow to servers abroad and not properly verifying its customers. During the annual inspections led by RBI, it was found that the Paytm Bank’s servers were sharing information with the China-based entities that indirectly hold a share in the company. To safeguard the RBI now wants Paytm Bank to appoint an IT auditor in consultation with the RBI. 

Clarification from the Paytm Bank:

Paytm Payments Bank has over 300 million wallets and 60 million bank accounts and over 100 million KYC-compliant customers. According to the bank, “A recent Bloomberg report claiming data leak to Chinese firms is false and sensationalist. Paytm Payments Bank is proud to be a completely homegrown bank, fully compliant with RBI’s directions on data localisation. All of the Bank’s data resides within India.” 

Post the ban, Paytm has said that the ban will not impact their existing customers, and they can continue to use their banking services as they have been doing. Paytm will comply with the directions of RBI and will minimise any inconvenience caused to customers.

Remarks from CEO:

As per CEO of Paytm Vijay Sharma, “ Paytm Bank systems are completely in India, governed by India’s data localization law. Access to systems are governed by IT rules and regulations of India. The Bank has its own management which consists of only Indians.” 

Talking about compliance he added that “The bank is in the process of completing necessary inputs suggested and will abide by the RBI timeline of submitting the audit documents”. The CEO is hopeful of carrying out the required changes and will continue to acquire customers through UPI.

Brokerage view

Last month, in an article, we covered the positive news for Paytm's shareholders. Most brokerage firms have set a higher target for the newly listed internet company. However, with this ban, the targets seem unrealistic at least for the near future. 

According to brokerage ICICI Securities, “The move will adversely impact on addition of new customers for wallets, savings/current accounts. The ban on customer acquisition shall cripple business growth for Paytm PB which is targeting to add half a billion to its fold.  Also it may differ PPBL’s plan to apply for conversion into small finance bank.”

Macquarie maintains an ‘Underperform’ call on Paytm with a target price of Rs 700. The brokerage firm does not expect the ban to significantly impact the business as it has already added a large customer base but expects RBI ban to have a significant impact on brand & customer loyalty.