Vijay Shekhar Sharma's Paytm gears up for life beyond Paytm Payments Bank

Vijay Shekhar Sharma, founder of One 97 Communications Limited, the parent company of the popular Paytm app, is preparing for a future without its associate, Paytm Payments Bank.

The bank has come under the scrutiny of the Reserve Bank of India due to "persistent non-compliances and ongoing supervisory concerns".

One97 Communications Ltd holds 49% equity, with Sharma owning the remaining 51% in this differentiated bank. The RBI allows payments bank under its differentiated licensing, to accept current and savings deposits and offer payments products, but no lending is allowed. Both entities share close business linkages.

The RBI's restrictions on deposits or credit transactions or top ups in customer accounts, prepaid instruments, wallets, FASTags, National Common Mobility Card (NCMC) cards, will have negative implications for the listed holding company.

In fact , One97 Communications' stock price has already declined by 36% in two days.

The stock, which is trading at Rs 487 per share, experienced a turbulent beginning since its IPO. Initially priced in the range of Rs 2,080 to Rs 2,150 per share, it witnessed a 20% decline on its debut. Currently, it has a one year high of Rs 998 and a low of Rs 487 per share.

The holding company estimates a potential adverse margin impact ranging between Rs 300-500 crore on its annual EBITDA. During an investor call, Madhur Deora, CFO & Additional Whole Time Director, expressed confidence, stating, "Over time, we will be able to significantly offset this impact."

The parent's Paytm app offers various payment instruments of Paytm Payments Bank such as Paytm Wallet, Paytm UPI, NACH, Paytm FASTag, and Fixed Deposits. While the parent historically partnered with Paytm Payments Bank for these products, which was also logical, the future strategy involves collaboration with other banks.

There are primarily two lines of business between the parent company and Paytm Payments Bank. The bank's pre-paid payment wallet allows consumers to make payments across Paytm’s merchant network. This involves customers loading money into the Paytm wallet, where parent provides a payment service through Paytm Payments Bank, earning revenue from the float. Subsequently, when customers use their wallet to pay a merchant QR, online or offline, Paytm earns MDR, which is the merchant discount rate.

The challenge now is transitioning existing merchants, especially offline vendors, from Paytm Payments Bank to another bank. The parent is currently in talks with multiple banks to facilitate this transition. Bhavesh Gupta, President & COO, mentioned that discussions would also involve engagements with regulators and NPCI.

In fact, new acquisitions of merchants after the ban will be done under the umbrella of the new bank or banks.

Vijay Shekhar Sharma told investors that the company is actively reducing its reliance on Paytm Payments Bank, though there still exists a significant dependency. "It's crucial to note that these relationships are payments-related, meaning all banks have the necessary technology and capabilities," he said.

The parent company also distributes Paytm FASTags issued by Paytm Payments Bank. While this would be impacted , but over the past 18 months, the parent claims that it  has been issuing a substantial number of FASTags from a prominent private bank through the Paytm app.

The RBI has also directed the termination of nodal accounts of One97 Communications and Paytm Payments Services Ltd. As per RBI regulations, online payment intermediaries must collect funds in a nodal account, which, for One97 Communications and Paytm Payments Services, was Paytm Payments Bank. The company is in the process of moving nodal accounts to other large commercial banks.