Mumbai/Bengaluru: India’s central bank would set the terms of reference for an independent technology audit of Paytm Payments Bank after the regulator banned the onboarding of new customers for alleged violations of customer acquisition and privacy rules that may have included possible data flow to companies of Chinese origin, two people familiar with the matter told ET. Founder Vijay Shekhar Sharma denied a media report that alleged data sharing with Chinese entities may have led to the regulatory curbs.
Vijay Shekhar clears the air about RBI's curbs on Paytm Payments Bank
Watch Vijay shekhar speak about Paytm Bank, with ET Now's Nayantara Rai on RBI curbs
Over the next few days, Paytm Payments Bank will submit to the regulator for its approval several names as potential audit candidates, and the regulator may finalise the terms of reference based on its findings that include a series of lapses in meeting the Know Your Customer (KYC) norms, said those people, who did not want to be named.
"The payments bank did not plug the gaps in the system even after repeated relevant references by the regulator. There were consistent deficiencies found in the bank's KYC process, like accounts that needed a full KYC were not done,’’ said one of the persons cited above. “Data from the payments bank was also flowing to the wallet operator, which was not quite a watertight compartment and against central bank rules. All in all, compliance was either pending, or unsatisfactory."
The One 97 Communications Paytm stock, now valued at less than a third of its initial offer price, sank to a 52-week low on Monday. Paytm eventually lost 13% on the day to end at Rs 674.80 apiece on the National Stock Exchange (NSE). To be sure, the Reserve Bank of India (RBI) ordered curbs on the payments bank late last week.
Founder Denies Breaching Data Rules
ETtech
Paytm’s founder, billionaire and majority shareholder Vijay Shekhar Sharma, denied any sharing of data with Chinese companies.
"I want to inform and confirm that in various observations RBI has shared with Paytm Payments Bank, there is absolutely no reference to any data sharing or servers being outside or data sharing with any unauthorized personnel national or international--any country whatsoever," Sharma said, denying a Monday afternoon Bloomberg report that said data sharing with Chinese entities was the primary reason behind the central bank action.
Sharma said the banking regulator's communication with Paytm Payments Bank has detailed the timeline, scope and tasks to be done.
"Expectations are clearly chalked out and a timeline has been given to us (by the RBI),” Sharma told ET. “We believe that we will be able to complete the IT audit within the timeline and submit it." He didn’t specify the submission timelines.
Sharma was non-committal on whether the current RBI curbs were linked to the action Paytm faced in June 2018, when the regulator had made certain observations about the processes the company followed to acquire new users, especially in relation to KYC norms,.
"In 2018, there was no fine imposed and we ironed out the issues within months....whether this new issue is linked to that, I cannot comment because I do not remember what that issue was exactly about," Sharma said.
Operational Curbs
The RBI on Friday barred SoftBank- and Alibaba-backed Paytm Payments Bank from adding new customers due to likely gaps in its technology systems, potentially denting its small finance bank aspirations and further roiling investors skeptical of the fintech’s ability to boost earnings after an expensive initial share sale.
The central bank said onboarding of new customers by Paytm Payments Bank will be subject to specific permission to be granted by the RBI after reviewing (the) report of the IT auditors. “This action is based on certain material supervisory concerns observed in the bank," RBI said.
Sharma said the RBI's action pertained to "technology related" matters. He declined to share the details of RBI's precise guidelines to Paytm.
Sharma also said the banking regulator has not raised any concerns about ownership of the payments bank.
Sharma owns 51% in the bank and the rest is held by the listed One 97 Communications, the parent firm of Paytm whose investors include Chinese tech and ecommerce giant Alibaba.com with a 31.17% stake.
However, one of the persons cited above said the regulator is concerned due to instances of data leakage between the wallet Paytm and the payments bank, potentially leading to inadvertent data sharing with foreign companies.
"These two entities have a commercial relationship but there have been instances of data being shared, and that data may have made its way to other affiliates abroad, which is a strict no-no for the RBI," this person said.
Sharma said that shareholding of Paytm or Paytm Payments Bank was not in question as the bank is not directly controlled by Paytm shareholders.
The RBI will have a say on which company audits the bank. It will also likely ask Paytm Payments Bank to make the necessary process, KYC and IT- related changes based on the audit results before the ban is lifted.
