Data leak not behind RBI action, clarifies Paytm

Paytm has refuted reports claiming that its payments bank arm faced regulatory action as it shared data with Chinese firms. Last week on Friday, the Reserve Bank of India (RBI) had barred Paytm Payments Bank from onboarding new customers with immediate effect, citing certain "material supervisory concerns".

A report later alleged citing anonymous sources that Paytm Payments Bank (PPBL) was prohibited from registering new customers as it had allowed data to flow to foreign servers. This allowed sharing data with Chinese entities that indirectly own stake in the company in violation of regulatory protocols.

Paytm Payments Bank being a regulated financial institution – it received RBI’s approval to operate as a scheduled payments bank in December 2021 – is required to maintain a service level agreement with its technology vendor that ringfences it from its owners. The report further mentioned that location of servers was not immediately known and that there’s no implication that Paytm Payments Bank was storing information abroad.

The report also claimed that the payments bank onboarded thousands of customers without following the required know-your-customer procedure, raising concerns that some of them could be involved in money laundering.

Contesting the claims, Paytm denied any data leak to Chinese companies and assured complete compliance with RBI norms.

“The recent Bloomberg report on Paytm Payments Bank claiming data leak to Chinese firms is completely false and simply sensationalizing. Paytm Payments Bank is proud to be a completely homegrown bank and is fully compliant with RBI’s directions on data localisation. All of the Bank’s data resides within the country. We are true believers of the Digital India initiative, and remain committed to driving financial inclusion in the country,” a Paytm spokesperson told Fortune India.

Late night on Monday, Paytm also sent its clarification on the matter to the exchanges. "...the regulator has not expressed any concerns regarding data leak or access shared with any Chinese firms. PPBL’s data servers are located within India and it proudly supports data localization. The Reserve Bank of India (RBI) directive to PPBL to temporarily halt onboarding of new customers, via a letter dated March 11, 2022, is not regarding any data leak to any foreign national or firms. PPBL remains committed to working with the regulator to address their concerns as quickly as possible," Paytm parent One 97 Communications said in an exchange filing.

"PPBL has further informed the company that source-based media reports claiming data leak to Chinese firms are completely false, inaccurate and unverified. The bank is fully compliant with RBI’s directions on data localisation and all of the users’ data resides within India," it added.

In an order dated March 11, 2022, the RBI “in exercise of its powers, inter alia, under section 35A of the Banking Regulation Act, 1949, directed Paytm Payments Bank Ltd to stop, with immediate effect, onboarding of new customers.”

The banking regulator also directed Paytm Payments Bank to appoint an IT audit firm to conduct a comprehensive system audit of its IT system. Onboarding of new customers by Paytm Payments Bank will be subject to specific RBI approval after reviewing the IT auditors' report , it further added.

Following the action, Paytm Payments Bank assured its customers that their accounts remain fully functional and deposits safe.

“We are taking immediate steps to comply with RBI directions. PPBL remains committed to working with the regulator to address their concerns as quickly as possible. We shall notify when we recommence the opening of new accounts after obtaining RBI approval,” it said in a statement a day after RBI’s order.

“The savings of existing users in their PPBL account, their fixed deposits with partnered banks and the balance maintained in their Paytm Wallet, FASTag or Wallet Card and UPI services are completely safe and functional. Any new users coming to the Paytm app can create Paytm UPI handles, and link them to their existing PPBL account or to other bank accounts. However, new users can not, until further notice, sign up for new PPBL wallets or PPBL savings or current accounts,” it added.

In an earlier action on October 20, 2021, RBI had imposed a monetary penalty of ₹1 crore on Paytm Payments Bank Limited (PPBL). The penalty was imposed against a violation of Payment and Settlement Systems Act, 2007. On examination of PPBL’s application for issue of final certificate of authorisation (CoA), it was observed that PPBL had submitted information which did not reflect the factual position, RBI had noted in the order.