Banking laws and regulatory shake-ups

Regulatory action against Paytm's payments bank points to the need for reform of banking regulation

A press release issued by the Reserve Bank of India (RBI) two weeks ago directed the Paytm Payments Bank Ltd (PPBL) to stop onboarding customers with immediate effect. Existing customers were allowed to withdraw or utilise the balance in all their accounts but were not permitted to make additional deposit or credit transactions. No other banking services can be carried out by PPBL after February 29. Essentially, the RBI has stopped the operations of the PPBL. Why was this done? An established and respected regulator like the RBI does not act without reason and justification.

We presume that PPBL has engaged in egregious violations that necessitated a drastic response. It is likely that many smaller violations have occurred in the past. We would also presume that the top-management of PPBL was informed about the violations and given a chance to correct past behaviour. But these are presumptions; the truth is we do not know.

We do not have a formal legal order from the RBI setting out the failures and the justification for the action. All we have is a press release that specifies punishments, without offering evidence or rationale.

The press release simply says that "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".

This statement leaves many questions unanswered. We do not know whether a hearing took place, we have not heard PPBL's side of the story, and we do 11 ILLUSTRATION: BINAY SINHA not know the RBI's rebuttal of PPBL's defence. It is thus unclear whether due process and rule of law principles were followed by public authorities before imposing punitive actions.