Will Paytm be thrown a lifeline?

The Reserve Bank of India’s (RBI) harsh crackdown on Paytm has shaken up the subcontinent’s fintech sector. If Paytm were to lose its payments bank due to the RBI’s directives, not only would the future of India’s largest fintech look more uncertain, there also could be unpredictable knock-on effects that reverberated throughout the industry. While the RBI’s move initially appeared to be abrupt, recent media reports suggest that the regulator had issued multiple warnings to the company over dealings between its payments bank and its payments app over the past two years that were not heeded. 

While Indian regulators at different agencies have been quoted as saying that Paytm’s compliance has been problematic, and cited inadequate money-laundering controls, we find it hard to believe that this kind of compliance deficiency would warrant such strong regulatory action. 

So what could cause the RBI to hobble a key part of Paytm’s business? It might have something to do with Chinese investment in the company – which has been a sensitive issue ever since tensions flared up between Beijing and New Delhi in 2020. On Feb. 11, Press Trust of India reported that an inter-ministerial committee is examining foreign direct investment (FDI) from China in Paytm Payments Services Ltd (PPSL), a subsidiary of Paytm parent One97 Communications Ltd. Under Press Note 3, the Indian government had made its prior approval mandatory for foreign investments in any sector from countries that share land borders with India to curb opportunistic takeovers of domestic firms. China is among the countries that share a land border with India. Though Ant Group has reduced its stake in Paytm to less than 10%, it is possible that Indian regulators want to see a full exit. 

Investment bank Macquarie, which has always been bearish on Paytm, on Feb. 12 wrote in a research note that it expects Paytm will see a significant reduction in revenue and that the regulatory crackdown poses a “serious risk of exodus of customers.” Macquarie further noted that Paytm is also likely to face challenges retaining its lending partners. The Indian fintech giant lacks a license to operate as a non-banking financial company (NBFC), and acts as a distributor in connecting lending partners with borrowers. 

Unsurprisingly, Paytm’s share price continues to take a beating amid all the uncertainty surrounding the company and is currently hovering around 342 rupees. In the past five days of trading, it has shed almost 28% of its value. 

For its part, the RBI should be cognizant that overly draconian action against Paytm could backfire and undermine investment in one of the world’s most dynamic fintech markets. In fact, concern about the regulatory environment is already taking a toll. The SoftBank Vision Fund’s executive managing partner Navneet Govil told Bloomberg on Feb. 8 one of the reasons SoftBank has sold off most of its Paytm shares is that the investment juggernaut saw the regulatory environment growing increasingly unpredictable.