Paytm crackdown prompts more RBI scrutiny on Indian banks

For Indian regulators trying to crack down on potential fraud in the financial sector, Paytm may be the start.

India surprised investors last month by suddenly suspending most of its banking activities. Paytm, a once high-flying fintech star who had the backing of Warren Buffett and SoftBank Group. While the Paytm case was an extreme example of customer authentication errors — it allegedly used a single identity document to open thousands of accounts — the crackdown is indicative of growing impatience on the part of authorities.

Hardly a day goes by when a bank or fintech firm isn’t fined for failing to properly vet its customers, with top lenders from State Bank of India to Citigroup snared. Fed up with constant shortcomings, Reserve Bank of India The governor is likely to get tougher. Shakti Kanta Das The term expires this year.

“The RBI has a lot of tools and the penalty is just the beginning,” said Prakash Aggarwal, founder of Gefion Capital Advisors. He said the fines “serve as a symbolic warning for more serious actions to come, such as action against a hammer.” Paytm Bank“

Regulatory concerns are rising as lenders rush to open more accounts and collect deposits to meet rising demand for loans in the fast-growing economy. According to Ashok Hariharan, chief executive officer of IDfy, most banks usually outsource the last mile of customer verification to third-party firms or so-called runners, and this massive paperwork process has leakages at several points. , which provides client testing services. Banks and Fintex Firms in India.

While big banks can do a lot, it’s a challenge to deal with firms that don’t have strong fraud and risk teams, he said.

RBI Governor Das has repeatedly warned about the need to strengthen risk management in banks and shadow lenders. While bad loan rates are at their lowest level in more than a decade, these flaws in consumer verification remain a major concern for the central bank.

“The interest of depositors and consumers is paramount. “Financial stability is of prime importance,” Das said at a monetary policy briefing later this month.

While Indian banks have increased spending on technology to detect potential money laundering and prevent fraud, cases are on the rise. Frauds of over billions of rupees have been reported. 100,000 ($1,205) rose 68 percent to more than 14,000 from April to September last year, nearly three times as much for the previous six-month period, according to an RBI report. Data shows that the biggest increase in fraud cases was in credit cards, online transactions and deposits.

The RBI, which can impose a maximum penalty of Rs. The fine of Rs 50 million for violations was reduced from Rs 400 million in the fiscal year ended March. 650.3 million last year. Yet, in the current financial year, the frequency of such fines has increased sharply, as can be analyzed from the central bank’s website.

“RBI getting tough on KYC is the right thing to do, and people are going to be serious about it now,” said IDfy’s Hariharan. “In many cases, there is a lax attitude towards KYC.”

According to Hariharan, consumer data has been misused in the country. In a typical setup, fraudsters pay runners who collect so-called know-your-customer documents for bank customers and offer them at least Rs. 500 for the figure, he said. He added that this allows fraudsters to operate multiple bank accounts with identity theft, and to deposit money into those accounts by tricking large numbers of consumers through phishing calls.

crack down

In addition to the crackdown on banks, the RBI this month ordered Visa to immediately stop payments services where the cards were used for transactions with merchants who were not allowed to accept such payments. It was not allowed.

No recent case has garnered as much attention as that of Paytm, controlled by billionaire Vijay Shekhar Sharma. The firm burst onto India’s equity markets in 2021 with a $2.5 billion (roughly Rs 20,737 crore) initial public offering, the largest ever in the country and attracted global investors. Masayoshi Son’s SoftBank was on the board, as was China fintech giant Ant Group and the Canada Pension Plan Investment Board.

Its affiliate, which takes deposits and offers payment services similar to PayPal Holdings, has been in the regulator’s crosshairs. On January 31, India’s central bank barred Paytm Payments Bank from accepting fresh credits to its customer accounts or mobile wallets after February 29. Bloomberg News reported that millions of users have not submitted their KYC documents.

RBI’s move dealt a major blow to Paytm and sent its stock plummeting. Regulators last week extended that deadline to March 15, and Paytm is in talks with other banks to clear merchant payments.

According to KV Karthik, who leads the financial services sector for Deloitte in India, compliance and accountability are major challenges for the financial system, which now includes many links between banks, fintechs and others.

“With so many small fintech firms growing so fast in the ecosystem, the RBI probably wants to send a strong and clear message that everyone should follow the rules very seriously,” said Gefion Capital’s Agarwal.

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