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The backstory: Indian fintech giant Paytm, also known as One 97 Communications, has long been a key player in India's payment sector, securing early investments from heavyweights like SoftBank and Ant Financial. The company essentially makes it easier for people to make payments and transfer money, kind of like competitors Venmo and Google Pay. But its stock has slumped more than 70% as investors aren't so sure about its profitability, and they also worry about its run-ins with government regulators.
Paytm completes its transactions in India through a separate arm called Paytm Payments Bank, which has gotten heat from regulators after an audit brought up accounting and supervisory problems, according to insiders speaking with Bloomberg. Regulators have warned Paytm about these issues over the past few years. They've also brought up concerns with top execs wearing hats in both the bank and the tech company, which might cause conflicts of interest. Over the last few quarters, SoftBank has been cutting its stake in the company, and Berkshire Hathaway and Alibaba have exited completely.
The development: The Reserve Bank of India (RBI) has now hit the brakes on Paytm Payments Bank's operations. The RBI said this was because of persistent non-compliance and supervisory concerns and said the firm has to stop all its mobile wallet and banking activities after February 29. Following the decision, the company's stock plunged 20% in Mumbai on Thursday.
Despite the setback, Paytm's President Bhavesh Gupta is hopeful about talks with the RBI, according to a call with analysts on Thursday, and is aiming for a return to business as usual by March. CEO Vijay Shekhar Sharma sees the RBI's actions as a temporary challenge and is working to partner with other banks instead.
"The bigger issue is Paytm has not been on the good books of the regulator and going forward, their lending partners also could possibly re-look at the relationships," said Macquarie analysts including Suresh Ganapathy in a note.
"While we don't believe that the order is an end of the road for Paytm, it materially impacts near-term growth, profitability, forces another pivot and necessitates it to restore credibility of durability of the business," said JPMorgan analysts in a note.
"For all practical purposes, the above notifications end the operations of Paytm Payments Bank," said Bernstein analysts in a note. "This is a definite negative development and adds to the already heavy regulatory overhang on the business."