Following the RBI’s ban on Paytm Payments Bank’s services, the share of One 97 Communications fell another 10% on Monday, February 5, 2024, settling at an all-time low at Rs 438.5 since listing. The regulatory challenges intensified with allegations of money laundering, prompting an investigation by the Directorate of Enforcement (ED). However, the fintech firm has firmly denied any such ongoing investigations.
“Neither the company nor its founder and CEO are being investigated by the Enforcement Directorate regarding, among other things, money laundering,” In a recent clarification issued, Paytm stated.
Since the RBI’s announcement on the evening of January 31st, Paytm shares have consistently experienced a decline. Notably, in the last three trading sessions, the stock has dropped by a significant 42.4% of its value, equivalent to a massive loss of Rs 20,500 crore in market capitalization.
Rajesh Palviya, a market expert from Axis Securities, advises against engaging in bottom fishing, underscoring that the market has yet to fully assimilate the ongoing developments.
Brokerages, initially optimistic about Paytm’s path to profitability after the IPO fiasco and listing crash, have now turned vocal in advocating sell positions.
Paytm Payments Bank Limited (PPBL), in which One97 Communications holds a 49% ownership stake, has received a directive from the Reserve Bank of India (RBI) to halt most of its operating functions, including deposits, PPI (Prepaid Payment Instruments), wallets, Fastag, BBPOU (Business Correspondent), and UPI (Unified Payments Interface). The deadline for compliance with these measures is set for the end of February 29, 2024. Additionally, the RBI has instructed PPBL to refrain from engaging with Paytm’s other business units for Nodal accounts.
The RBI’s action against Paytm Payments Bank is a response to reported instances of non-compliance and supervisory concerns.
Macquarie, one of the biggest financial services companies, has shared its perspective on the challenges faced by Paytm. According to Macquarie, the RBI’s recent ban on Paytm Payments Bank could have significant repercussions on the company’s overall revenue and profitability in the medium to long term. Suresh Ganapathy from Macquarie emphasized these severe restrictions could hinder Paytm’s ability to retain customers and limit its capacity to sell payment products and loan products.
Macquarie has drawn a comparison with a previous situation involving the largest private sector bank, highlighting that the RBI took 15 months to lift the ban on its digital business activities. In contrast, in Paytm’s case, the initial ban in March 2022 for onboarding new customers occurred 22 months ago. During this period, the RBI conducted a comprehensive IT audit and continued identifying non-compliance, indicating significant lapses.
The analysis from Macquarie implies that there may not be a near-term solution to Paytm’s regulatory challenges, potentially leading to the indirect revocation of Paytm’s Prepaid Instrument (PPI) license by the RBI. Macquarie also raised concerns about Paytm’s relationship with the regulator, suggesting that their lending partners might reconsider their relationships going forward.
It’s important to note that Macquarie made these assessments without direct interactions with Paytm’s management, and the views are based solely on their interpretation of the RBI’s actions and the available information.
Analysts at Jefferies also caution that the impact on Paytm’s business extends beyond regulatory issues. They highlight reputational concerns related to governance and compliance and anticipate challenges in the lending business. Despite management’s guidance of a potential EBITDA impact of Rs 300-500 crore (20-30% of FY25 earnings), Jefferies suggests a higher hit of 45%, factoring in an additional 20% impact from a sustained lending business slowdown.
In response, Paytm has officially announced its intent to strengthen its relationships with prominent third-party banks. This move aims to expand the distribution of payments and financial services products to Paytm’s customer base.
Meanwhile, amidst the crisis, shares of Jio Financial Services (NSE: JIOFIN) surged 14.6% on Monday, trading at ₹290.95, following reports that One 97 Communications is in talks with Jio and HDFC Bank to sell its wallet business.