What Lessons Can Be Learnt from Paytm’s Troubles? How Will This Impact You & Mutual Fund Industry?

Compliance holds key to maintaining integrity of any company. The recent Paytm Payments Bank’s debacle is a perfect example of how a company failed to adhere to the guidelines of the Reserve Bank of India (RBI), particularly, the KYC procedures. Despite repeated warnings, the bank failed to take necessary steps.

While the RBI has not specified the exact reasons for putting restrictions on Paytm, it had indicated “persistent non-compliances and continued material supervisory concerns in the bank warranting supervisory action”.

There have been reports that close relations between Paytm Bank and China-funded One97 Communication – Paytm’s parent company – might have led to such stringent action by the RBI.

This is not the first time that the RBI had warned Paytm about the non-compliance. Last year, it levied a penalty on the Paytm Bank for not identifying the beneficial owners of the entities it added for regulatory services.

The RBI had also alerted Paytm on delaying reporting cyber security incidents by the bank, and loopholes in its customer identification infrastructure. In 2022, the RBI had raised concerns about Paytm Bank’s IT system and put a restriction on adding more customers.

Media reports have also claimed fake accounts under payments bank, and accused it of money laundering and spurious transactions.

How It Will Impact Your Finances

If you use Paytm app for UPI and wallet payments, you should able to work normally. But if you are using the bank account, then there could be issues.

There are no restrictions on the use of app to transfer money or withdraw it from the wallet or account. Account holders can freely transfer money out of the wallet and bank accounts but cannot receive money from March 1.

Customers can extinguish their balances in Paytm Fastag or National Common Mobility Card but they cannot load their account with more money from March 1, 2024.

While the RBI has banned on boarding of new customers at Paytm Payments Bank, it prohibits Paytm from undertaking any credit or deposit transaction after February 29, 2024.

“Paytm has recently announced its plan to downsize its BNPL operations and was working to mitigate the impact by scaling up higher-ticket Personal and Merchant loans. Against this backdrop, the latest measures raise serious concerns over its business outlook and dent overall investor confidence. We, thus, remain watchful of PAYTM’s business model and its ability to navigate through this highly uncertain regulatory and macro environment,” said brokerage Motilal Oswal as quoted by Business Standard.

What about Mutual Funds?

With Paytm’s shares tanking 20%, there will be impact on mutual funds and retail investment. Some schemes have invested up to 4-5% of their portfolio in Paytm stock.

The mutual fund industry’s collective exposure to One97 Communication stands at Rs 1,995 crore as of December 31, 2023, which is only 0.06% of the total equity assets under management (AUM), said Fisdom Research as mentioned in a Business Standard report.

Equity funds with the highest allocation to One97 Communications Ltd. (Paytm) are Mirae Asset Large Cap Fund, Mirae Asset-Focused Fund, Quant Mid Cap Fund, Nippon India Large Cap Fund, Mirae Asset ELSS Tax Saver Fund.

For the unversed, Paytm’s share price on February 1 saw huge selling pressure. Paytm shares opened lower at Rs 608.80 apiece on BSE and touched a 20% lower circuit within a few minutes of the stock market’s opening bell.

What are the Lessons to Learn from the Fiasco?

Regulatory Compliance: Non-compliance can cripple businesses and operations even if they were long established. They must prioritise adhering to regulations even during the peak of growth.

Transparency: The need for transparency is paramount when making financial transactions. Communication with regulators and customers is the key. Maintaining robust security of user funds and data is crucial to establish trust and mitigate potential threats.

A tool that could gauge the potential operational risks could be developed to impose certain standardised restrictions before the damage. All stakeholder should set right their internal risk management systems to ensure sustainability, according to a report in The Times of India.