Paytm Payment Bank Ltd (PPBL) a wholly owned subsidiary of fintech major – its parent company One97 Communications Ltd, (OCL) is facing stiff RBI action due to its protracted indifference towards operational risk that reached a tipping point. The kind of glaring persisting irregularities and blatant violation of licensing terms could be disastrous not only for PPBL and (OCL) but for several of its stakeholders. The dip in its share price has already eroded wealth of Rs. 22500 crores at the break of news of regulatory action. Amid such exacerbating operational risks, RBI had to invoke Section 35 of the Banking Regulation Act 1949 imposing operational restrictions wherein it directed PPBL that there would be:
(i) No further deposits, credit transactions, or top-ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, National Common Mobility Cards (NCMC) etc. after February 29, 2024.
(ii) withdrawal or utilization of balances by its customers from their accounts including savings bank accounts, current accounts, prepaid instruments, FASTags, NCMC, etc. are to be permitted without any restrictions, up to their available balance.
(iii) No other banking services, other than those referred to in (ii) above, like fund transfers (irrespective of name and nature of services like AEPS, IMPS, etc.), BBPOU, and UPI facility should be provided by the bank after February 29, 2024.
(iv) The Nodal Accounts of OCL and PPBL are to be terminated at the earliest, in any case not later than February 29, 2024.
(v) Settlement of all pipeline transactions and nodal accounts (in respect of all transactions initiated on or before February 29, 2024) shall be completed by March 15, 2024, and no further transactions shall be permitted thereafter.
The restrictions are ostensibly clearing the way for a further drastic change. Either the PPBL will cease to exist after revoking its license or will be taken over by another entity after RBI, most likely supersedes its board. In any case, the financial sector is set to witness a seismic disruption due to its sheer size of retail base.
- Key grounds for action:
KYC violations, alleged fudging of the customer base, linking the same Pan for onboarding multiple customers, conducting transactions beyond the limits creating doubts about likely money laundering, and many other serious irregularities building up operational risks. The continued dependence on OCL – its parent body and using it as a conduit to interchange transactions despite RBI insisting on separating its infrastructure and payment linkages added to the operational risks.
Having come into operations in November 2017, PPB had enough time to stabilize its independent infrastructure to keep OCL at arm’s length in the management of wallet operations and even after close to 6-7 years, it could not comply with the terms of licensing. How these adversities could persist when the fully functional board and its subcommittees were in place to manage risks well.
The forewarning of RBI about operational irregularities began in June 2018 when it instructed PPBL to stop onboarding new customers which was lifted in January 2019. Again, in October 2021, RBI levied a penalty of Rs. One crore as the information submitted seeking final certificate of authorisation did not reflect the factual position. In March 2022 RBI asked PPBL to stop onboarding of new customers with ‘immediate effect.’ RBI imposed a fine of Rs. 5.39 crore over non-compliance with its directions relating to licensing guidelines, enhancement of maximum balance at the end of the day and in relation to the cyber security framework, and securing mobile banking applications, including UPI ecosystem.
- Implications of the move:
The collateral damage of the PPBL fiasco could be a major disrupter to the emerging Fintech community and start-up ecosystem that is fast making inroads to widen the financial sector. It may impact the journey of digitalization of the financial sector and financial inclusion. Seizing the vulnerable opportunity, many cyber fraudsters can make way to defraud customers possessing low digital literacy.
Even if the number of customers is far less than the claim of 330 million using Paytm wallets for their day-to-day transactions, how they can cope with the tectonic disruptions underway that could be another cause of concern. Many customers are so used to the convenience of retail payments using wallets that shifting to another service provider could be a massive task.
- Learning from the fiasco:
The regulated entities of RBI should take a cue from the current crisis of PPBL and develop appropriate internal micro-prudential norms to regulate governance, risk, and compliance (GRC) to ensure the orderly growth of business. The systemic controls driven by technology should be well designed to capture regulatory deviations at a nascent stage to trigger corrective actions. In a trade-off between institutionalizing a sturdy GRC framework and growth, the former should get precedence. In the past regulatory penalties imposed on regulated entities, in most cases, targeting growth beyond achievable levels has been the underlying cause of violations. In a bid to achieve more, the regulations are overlooked.
When the financial sector is on a binge of innovation and interconnected risks are fast perpetuating, the regulators and regulated entities will have to revisit their internal controls and surveillance on the adequacy of risk management systems. Though RBI has extended prompt corrective action to NBFCs, they are set to capture certain quantified parameters where operational risks easily escape the lens.
Connecting to the ICAAP and the history of regulatory violations, tools can be built to bring the regulated entities under a specified framework of scrutiny if the quality of operations deteriorates.
A pre-emptive tool to measure the rise in operational risks could be developed to impose certain standardized restrictions before the damage could lead to self-inflicted injury. Even the global financial sector risks indicate that capital may not necessarily be the answer for all ills, particularly when operational risks are wilfully allowed to precipitate. RBI, by its earlier warnings and penalties, had provided enough opportunities for PPBL to adopt a corrective course of action which it could afford to deride causing immense collateral damage to its stakeholders. All stakeholder should set right their internal risk management systems to ensure sustainability.
Courtesy : https://timesofindia.indiatimes.com/blogs/kembai-speaks/the-perils-of-ignoring-operational-risk/#amp_tf=From%20%251%24s&aoh=17075511302770&referrer=https%3A%2F%2Fwww.google.com