After months of engagement and Paytm’s inability to take remedial action, in March 2022, the regulator took a hard call by barring the payment bank from onboarding new customers.
Among regulated entities, there is a rush to comply after any RBI action. But in this case, there was allegedly no serious attempt to rectify the errors, which ranged from non-compliance with KYC guidelines to other RBI regulations.
“The Comprehensive System Audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action,” RBI said.
In the case of payment banks, regulation is more light-touch because these entities are not allowed to lend, and they deal in small-value transactions. However, RBI is against combining funds of depositors, wallet-holders and shareholders.
What was the trigger to act on the eve of the interim Budget is unclear, but market players are likening it to a series of strict disciplinary measures taken by RBI in recent years. In 2020, it imposed restrictions on HDFC Bank to get new credit card customers or launch digital business-generating activities.
Last year, Bank of Baroda was barred from onboarding new customers on its mobile app. And Bajaj Finance was disallowed from sanctioning and disbursing loans under two of its lending products.
“It is not as if RBI takes this action when someone sneezes. It is done after detailed discussions with the entity, which is given an opportunity to correct the problem,” said a source familiar with recent actions.
Over the last few years, the regulator has also sharpened its supervision over entities, arming itself with many more tools that keep tabs on the volume of business by banks and finance companies and even businesses they lend to. Whenever it spots a sharp rise in growth or exposure, RBI officials have not shied away from discussing the issue, which in most cases has been a sure-shot nudge to go slow or take remedial action.
But whenever the response has been slow, including at the systemic level, RBI resorted to using the regulatory hammer – a case in point being the recent increase in risk weights for unsecured loans.
“The idea seems to be securing systemic stability. Strict action has only been taken where material violation is involved. Every action has been preceded by months of engagement and nudging them bilaterally to act. But if the entities are indifferent to the issues, RBI has to act,” said a source.