To be precise, shares in Paytm experienced a consecutive 20% decline for the second day following a regulatory directive to its banking arm to suspend operations. Despite reassurances from CEO Vijay Shekhar Sharma that the digital payments app would continue to operate normally, the company faced a substantial loss in market value, amounting to approximately USD 2 billion according to Reuters.
The Reserve Bank of India (RBI) took action against Paytm Payments Bank due to non-compliance with regulations and supervisory concerns, which, according to a source cited by Reuters, had persisted over several years. The banking unit plays an important role in powering the features of Paytm's digital payments app, competing with platforms such as Walmart's PhonePe and Google. Reuters further reports that millions of users rely on the app for fund transfers, bill payments, and maintaining digital wallets for retail transactions.
As of 1 March 2024, the RBI's directive prohibits the banking unit from accepting further deposits, engaging in credit transactions, or accepting wallet uploads. Fund transfers will also be restricted, potentially disrupting services unless Paytm secures new banking partnerships.
Paytm's CEO expressed confidence in finding new banking partners, emphasising the app's continuous functionality beyond 29 February. Despite his reassurances, Paytm's shares witnessed a 36% decline over two days, reaching 487.2 rupees on Friday, approaching record lows from 2022 and valuing the company at USD 3.7 billion.
Other Paytm officials anticipate a return to normalcy by March and highlighted positive discussions with the RBI. However, at least five analysts downgraded the stock to sell, and seven adjusted target prices to a range of 450-750 rupees, according to LSEG data cited by Reuters.
JPMorgan noted that the RBI's action negatively impacts Paytm's profit pools, network effects, and credibility, significantly affecting its core payments business, which contributes 59% to its revenues. The regulatory order also impacts Paytm's digital toll payment service, FASTag, as users will be unable to replenish it after February 29. Paytm holds a 17% share in this market segment.
The RBI's recent directive is part of ongoing efforts to bring Paytm into compliance. In the previous year, the RBI fined Paytm Payments Bank USD 650,000 for non-compliance, including violations of 'know your customer' rules. In 2022, the bank was barred from acquiring new customers, and a comprehensive audit of its IT systems was ordered, following Paytm's lacklustre stock market listing and concerns about its valuation and business model.
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