Due to this move of RBI, Paytm got a big blow and its stock fell.
For regulators looking to crack down on potential fraud in the financial sector, Paytm could be just the beginning.
India stunned investors last month when it suddenly suspended most activities of the banking affiliate of Paytm, once a high-flying fintech star that had received backing from Warren Buffett and SoftBank Group Corp. While the Paytm case was an extreme example of a lapse in customer verification – it reportedly used the same identity document to open thousands of accounts – this action signals the authorities’ growing impatience.
Hardly a day goes by without a bank or fintech firm being fined for failing to properly vet its customers, snaring top lenders from State Bank of India to Citigroup Inc. Fed up with continued deficiencies, the Reserve Bank of India is likely to face a fine. This year it has become even stricter before Governor Shaktikanta Das leaves office.
“The RBI has adequate tools and the fine is just the beginning,” said Prakash Aggarwal, founder of Geffion Capital Advisors. He said the fine is “a symbolic warning of more serious steps to come, such as the strong action taken against Paytm Bank.”
Regulatory concerns are rising as lenders rush to open more accounts and collect deposits to meet surging demand for loans in the fastest-growing major economy. According to Ashok Hariharan, chief executive officer of IDify, most banks typically outsource the final step of customer verification to third-party companies or so-called runners, and that massive paper process has leakages at multiple points in the process, which the customer is unable to verify. Provides testing services. Banks and Fintech companies in India.
While larger banks can do more, he said, it is a challenge to deal with companies that do not have robust fraud and risk teams.
RBI Governor Das has repeatedly warned about the need to strengthen risk management in banks and shadow lenders. Even though bad loans are at a more than a decade low, these lapses in customer verification have been one of the major concerns for the central bank.
“The interest of depositors and customers is paramount,” Das said at a post-monetary policy briefing this month. “Financial stability is extremely important.”
While Indian banks have increased spending on technology to detect potential money laundering and prevent fraud, cases are rising. According to an RBI report, reports of frauds worth more than Rs 100,000 ($1,205) rose 68% to more than 14,000 from April to September last year, almost three times more than the previous six-month period. The data shows that the sharpest increase in fraud cases has been in credit cards, online transactions and deposits.
The RBI, which can impose a maximum fine of Rs 50 million for violations, imposed fines of Rs 400 million in the financial year ended March, down from Rs 650.3 million the previous year. Yet, in the current financial year, the frequency of such fines has increased sharply, as can be seen from the central bank’s website.
“RBI being strict on KYC is the right thing to do and people are going to get serious about it now,” said IDfy’s Hariharan. “In many cases, a lax attitude towards KYC is adopted.”
According to Hariharan, customer data has been misused in the country. In a typical arrangement, he said, fraudsters pay so-called know-your-customer document gatherers for bank customers and offer them as little as Rs 500 for the data. This allows fraudsters to operate multiple bank accounts through identity theft, he said, and they collect money into these accounts by defrauding customers through mass phishing calls.
action
Apart from its action on banks, the RBI this month ordered Visa Inc to immediately shut down a payments service where the cards were used to conduct transactions with merchants that were not allowed to accept such payments.
Yet no recent case has attracted as much attention as that of Paytm, controlled by billionaire Vijay Shekhar Sharma. The company entered India’s equity markets in 2021 with a $2.5 billion initial public offering, the largest ever in the country and attracted many global investors. Masayoshi Son’s SoftBank was on the board, as was China’s fintech giant Ant Group Co. and the Canada Pension Plan Investment Board.
Its sister company, which takes deposits and provides payment services like PayPal Holdings Inc., has been in the regulator’s crosshairs. On January 31, the RBI barred Paytm Payments Bank Ltd from accepting fresh credit to its customer accounts or mobile wallets after February 29. Bloomberg News has reported that hundreds of thousands of customers have not submitted their KYC documents.
This move of RBI dealt a big blow to Paytm and its stock fell. Regulators last week extended that deadline to March 15, and Paytm is in talks with other banks to approve merchants’ payments.
According to KV Karthik, who leads the financial services sector for Deloitte in India, compliance and accountability are big challenges for the financial system, which now involves so many links between banks, fintechs and others.
“With such rapid growth in so many small fintech companies in the ecosystem, the RBI probably wants to send a strong and clear message that everyone should follow the rules seriously,” said Agarwal of Geffion Capital.
