Behind the Scenes of PayTM Crash- Turmoil, Crisis and Future

Last Wednesday, January 31st, the Reserve Bank of India (RBI) made a decision that affects PayTM Payments Bank Ltd. They’re no longer allowed to accept deposits or let customers make credit transactions, including adding money to accounts or linked prepaid instruments like wallets and FASTags, starting from February 29th. But here’s the good news despite of PayTM Crash: customers can still use the money in their accounts without any restrictions, according to the RBI’s order.

In addition, the RBI has also terminated the nodal accounts of PayTM’s parent company, One97 Communications Ltd, and PayTM Payments Bank Ltd.

The Story Behind the PayTM Crash

Firstly, PayTM aims to attract customers by offering convenient payment options. Users can easily recharge their mobile phones and pay utility bills, while merchants benefit from payment gateway services and QR code-based offline payments.

Once users become comfortable with the platform, PayTM focuses on encouraging them to use it more frequently. This involves integrating e-commerce features such as movie ticket booking and shopping. Additionally, PayTM introduces helpful tools like soundboxes that notify merchants when payments are received, making their lives easier.

Ultimately, PayTM’s long-term strategy is to enter the financial services sector, particularly lending. This marks the third step in its plan to establish dominance in the market.

Imagine you’re a shop owner relying on PayTM’s payment system. In that scenario, PayTM has a deep understanding of your business transactions. Moreover, when it comes to merchants using UPI, PayTM stands out, commanding a significant 24% market share in transaction volume.

Let’s break down how it works: When customers make UPI payments, money moves from their bank to yours. PayTM’s Payments Bank often serves as the receiving bank in these transactions. With access to this extensive transaction data, PayTM can evaluate your creditworthiness. This means they could be your go-to option for securing quick loans to support your business needs.

On the consumer side, PayTM offers services like PayTM PostPaid, allowing users to buy now and pay later. They also provide traditional personal loans, giving consumers more financial flexibility.

Ok, let’s break that down a little more simply. Thereby, PayTM does not hold a full banking license which makes it impossible for the company to lend money directly. Instead, they have formed partnerships with other financial firms that can. At the end of FY 2018, i.e., the fiscal year ending March 31st, 2019 six lenders are partners along with PayTM including Shriram Finance and Aditya Birla Finance Ltd etceteras in addition to this; since then things have changed significantly enough viably increasing numbers down into as much at Every time these lenders dispense a loan to the customer via PayTM, a transaction fee is charged from them if they use funds overweighed by 1 % of the disbursed amount; it benefits PayTM in terms that facilitate throughout this process.

Now, here’s where it gets interesting. Over the past year, PayTM has focused on expanding its lending business. In the fiscal year 2021, they lent out just ₹1,400 crores. But by 2023, that number had shot up to ₹35,000 crores. Analysts at Jefferies even expect it to exceed ₹70,000 crores by fiscal year 2024.

PayTM has approximately 100 million users who use the app monthly for various transactions, such as mobile top-ups or purchasing movie tickets. Leveraging this user base, PayTM ventured into cross-selling loans, resulting in nearly 6 million loans being disbursed to new-to-credit users in fiscal year 2023. These individuals lacked previous loan experience and often did not possess a credit score. Consequently, PayTM emerged as the second-largest platform for acquiring unsecured credit customers, following Bajaj Finance.

Recognizing that lending involves not just disbursing funds but also effective repayment collection, PayTM made strategic moves. In fiscal year 2022, PayTM acquired Creditmate, a debt collection platform. Creditmate specializes in sending collection reminders, monitoring repayments, and collaborating with physical collection agencies for on-ground efforts. This acquisition likely contributed to PayTM’s improved recovery of overdue loans in recent years.

Overall, PayTM has demonstrated a serious commitment to its lending operations over the past few years. Consequently, investment research firms have expressed increasingly positive views on PayTM due to these developments.

But then, just last month, there was a shift.

It began with a warning from the Reserve Bank of India (RBI). They expressed concern about the surge in defaults within the small personal loan category (loans below ₹50,000). While the overall rate of bad loans in the retail segment remained below 1.5%, it had skyrocketed to 8.1% in this particular category.

There was a growing fear that the situation could deteriorate further before any improvement was seen.

In response, the central bank decided to take action. They opted to adjust something known as risk weights, a topic we covered in detail here. The RBI requires banks to reserve a portion of their capital before granting loans. However, not all loans are considered equally risky. For instance, home loans are deemed less risky due to the collateral involved, while unsecured personal loans carry higher risk. This means banks must reserve more capital when dealing with riskier loans. It was the RBI’s way of urging banks to proceed with caution.

Suddenly, these small personal loans seemed to be viewed as toxic assets.

When the RBI started tightening regulations, PayTM chose to take a more careful approach. They decided to step back voluntarily, showing everyone that they value responsible lending practices and managing risks properly.

But this move didn’t sit well with investors.

To understand why, let’s look at PayTM’s Postpaid loans business. This is essentially their Buy-Now-Pay-Later (BNPL) service. A big chunk of these loans, more than 70%, are for amounts below ₹50,000. What’s concerning is that almost half of all the loans PayTM gives out fall into this BNPL category. This means that PayTM’s main lending business is going to be seriously affected. Analysts at Goldman Sachs think that cutting back on these smaller loans will hit PayTM hard.

And here’s another thing to consider: 40% of the people who get personal loans from PayTM first start with BNPL. They might start by buying things in installments, and then PayTM feels confident about giving them bigger loans later. But now, with these changes, this initial way of checking if someone is reliable will no longer be there. Even though PayTM says they’ll start lending more in this area, things might slow down before they get back on track.

Since a big part of PayTM’s money, about 30%, comes from financial services, it’s no wonder investors got worried and caused the stock price to drop by 20% on Wednesday.

The Future

PPBL, PayTM’s banking arm, recently paused its main services like deposits and credit transactions, causing concern among employees about possible job losses. However, Vijay Shekhar Sharma, PayTM’s founder, stepped in to reassure the lending division staff that there won’t be any layoffs. He also mentioned that they’re in talks with the RBI and other banks for potential partnerships.

As PayTM navigates through these tough times, some users might start looking at other digital payment options. However, discussions about relaxing regulations in the fintech sector remain a hot topic in the news.