Prof. D. Mukhopadhyay
The genesis of the recent contention between Paytm Payments Bank(PPBL) originally incorporated with the name ‘Paytm E-Commerce Private Limited’ and the Reserve Bank of India(RBI), the Central Bank of the country, is the PPBL’s non-compliance with the regulatory norms. The RBI issued a directive on January 31, 2024 imposing restrictions on the operations of the PPBL on the ground of ‘persistent non-compliance and ongoing material supervisory concerns within the bank’ citing the provision of Section 35A of the Banking Regulation Act, 1949, as the reason behind this move.The PPBL has been directed not to accept deposits or top-ups in customer accounts, wallets, FASTags and other instruments after February, 29, 2024. The RBI observed major irregularities in KYC which are likely to expose stakeholders including the customers , depositors and wallet holders to serious financial risks. In this context, many are of the view that the PPBL is the symbol of technological innovation which provides a version of user-friendly Fintech and the proposed action of the regulator may act as a deterrent to technological innovation. In the wake of this view, it may not be exaggerated to acknowledge that the 21st Century is the age of technological disruption and technological innovation is the cause for rebuilding, reconstruction and remodelling of socioeconomic functioning in a more improvised manner so that maximum quantifiable benefits are achieved through transformation of the out-of-date delivery system. Technological disruptions may aptly be coined to be the technological renaissance, whose primary purpose is to reform by discarding the old and out of date system that causes more disadvantages than the cost-effective advantages and innovation has hardly any significant relationship with compliance requirements. Compliance is a risk management process aimed at securing the interest of the stakeholders.
There are hundreds of instances substantiating that non-compliance is the beginning of risk exposure. It is true that the share price of PPBL is facing the heat because of the recent intervention of the regulator and, as an immediate consequence, shares of the bank started falling to a significant magnitude. Stock markets all over the world function as per the laws of the respective countries and share price movement is significantly dependent on market sentiment and the perception of the investors formed on the basis of hearsay and rumours, which are beyond the scope of technical and fundamental analyses observed by many empirical studies on financial economics. Let us have a look on Satyam Computers , Global Trust Bank that failed due to non-conduct of due diligence in 2004, Sillicon Valley Bank(SVB), Singapore Bank and the First Republic Bank are the few among the multiple high profiled banks that suddenly collapsed like house of cards in 2023. Technological disruption is welcome at any time to continue with scientific exploration keeping pace with the advancement of science and technology which is independent of culture, religion, sovereignty and polity of any geographical boundary. As mentioned earlier, compliance with the relevant industrial norms and administrative directives is a risk management tool and it may be appreciable that ‘a stitch in time saves nine’ represents the wake up call given by RBI to PPBL in the greater interest of dreadful casualties likely to eclipse the confidence of the stakeholders of the bank in the mode of discharging statutory duties, responsibilities and functioning of the regulator and compliance with Section 35A of the Banking Regulations Act, 1949 in the present scenario. RBI’s intervention has added to the worries of both customers as well as digital payment service providers, given the move will have huge implications on company’s financial health. The RBI’s restrictions are likely to come into force after February 29, 2024 in the wake of persistent non-compliance and material supervisory concerns. In simplicity, the crackdown on PPBL came after a comprehensive system audit report and subsequent compliance validation report by the external auditors. The RBI had directed that the Nodal Accounts of One97 Communications Ltd (OCL), which owns Paytm, and Paytm Payments Services Ltd are to be terminated at the earliest, in any case, not later than February 29, 2024. The CEO, a part-time Chairman of the bank, sought some relaxation in the regulatory action on PPBL. It may be mentioned that the share prices of OCL are observed to have been plunged by about 20% for two consecutive days since the RBI’s decision. The focus now remains on how the PPBL authorities navigate through the crisis, retaining both investors’ and users’ confidence. To hint about the financial over the years, PPBL went on to report a gross merchandise of INR 13.2 lakh crore for Financial Year 2022-23 and the CEO of the bank featured in Forbes’ 2022 list with a net worth of $1.2 billion, despite its net-worth is observed to be declining from the 2019 peak. Innovation is often heralded as the cornerstone of progress, especially in the fast-paced world of financial technology.
However, the recent events surrounding PPBL serve as a stark reminder that innovation must not come at the expense of compliance. The RBI directives to PPBL, triggered by non-compliance issues flagged by external auditors, have sent shock-waves through the financial sector, causing a significant decline in PPBL’s share price. While some argue that the impending ban on PPBL post-February 29, 2024, may send a discouraging message to fin-tech multinationals, it is imperative to recognize that innovation and compliance are not mutually exclusive concepts.
Innovation, by its nature, thrives on creativity, risk-taking, and the pursuit of novel solutions to existing challenges. Fintech companies like PPBL have revolutionized the way financial services are accessed and delivered, offering convenience, efficiency, and accessibility to millions of users worldwide. However, amidst the drive for innovation, it is crucial not to lose sight of the regulatory framework that governs the financial industry. Compliance requirements are not mere bureaucratic hurdles; they serve to safeguard the integrity, stability, and trustworthiness of the financial system.
The case of PPBL underscores the importance of adherence to regulatory norms and best practices. The findings of external auditors point to lapses in governance, risk management, and internal controls within PPBL, raising serious concerns about the company’s operational integrity. The RBI’s intervention is not only a necessary corrective measure but also a preventive step to avert potential systemic risks and protect the interests of stakeholders.History is replete with cautionary tales of companies that flouted regulations in pursuit of unchecked growth and innovation. The demise of Global Trust Bank, the accounting scandal at Satyam Computer, and the regulatory troubles faced by Silicon Valley Bank, Singapore Bank, and Republic Bank serve as poignant reminders of the perils of non-compliance. The fallout from such scandals extends far beyond the companies themselves, eroding investor confidence, damaging market integrity, and jeopardizing financial stability.
By taking decisive action against PPBL’s non-compliance, the RBI is signaling its commitment to upholding regulatory standards and maintaining the trust and credibility of the financial system. While the ban on PPBL may have short-term implications for fin-tech multinationals, it sends a clear message that regulatory compliance is non-negotiable, regardless of the company’s size or reputation.
Moreover, it is erroneous to equate innovation with disregard for compliance. On the contrary, responsible innovation entails integrating compliance considerations into the DNA of organizational culture and processes. Fintech companies can harness innovation to enhance compliance mechanisms, leveraging technologies such as blockchain, artificial intelligence, and machine learning to automate regulatory reporting, detect financial crimes, and ensure data privacy and security.
The PPBL fiasco underscores the imperative of aligning innovation with compliance in the fin-tech industry. While innovation drives progress and competitiveness, compliance serves as the bedrock of trust, stability, and accountability. The RBI’s intervention serves as a timely reminder that regulatory oversight is essential to safeguarding the interests of stakeholders and preserving the integrity of the financial system. Moving forward, fin-tech companies must prioritize a culture of compliance, transparency, and ethical conduct to foster sustainable innovation and earn the confidence of regulators, investors, and consumers alike.
(The author is a Bangalore-based Educationist and Management Scientist)
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