In a surprising move, the Reserve Bank of India (RBI) has instructed Paytm Payments Bank to halt all banking services, including deposit acceptance and payment processing, by the end of February. The central bank has imposed a freeze on essential transaction services through Paytm’s platforms, affecting Unified Payments Interface (UPI), IMPS, Aadhaar-enabled payments, and more, effective February 29.

This disciplinary action, considered unprecedented in the financial services industry, is expected to have wide-ranging impacts on Paytm’s users and the merchant community utilizing the platform for payment processing, wage disbursals, and other quasi-banking functions.

According to an industry expert, the directive will particularly impact small enterprises relying on Paytm for salary payments, causing significant challenges for them.

Despite these setbacks, Paytm will continue offering various products, including travel and movie tickets, unaffected by the RBI’s order.

The payments bank, partially owned by One 97 Communications, faces disruptions for its Fastag users and National Common Mobility Card (NCMC) holders. The bank supports these services fully, and the order is likely to affect 57 million transactions reported through Paytm Fastags in December.

Furthermore, RBI has instructed all nodal accounts held by One 97 and Paytm Payments Services to cease operations by the end of this month. This includes a ban on accepting deposits, credit transactions, or top-ups in Paytm wallets. New customer onboarding was already prohibited from March 2022, and existing customers will no longer be allowed to add funds to their accounts after February 29.

To prevent consumers’ funds from being stuck, RBI allows withdrawal and utilization until a credit balance is available in Paytm accounts. However, adding fresh funds will be prohibited after February 29.

Despite its significant initial public offering (IPO) more than two years ago, Paytm has seen a decline in its stock value, with recent gains bringing the stock to Rs 761 as of January 31. One 97 reported a total revenue of Rs 2,850 crore and a net loss of Rs 222 crore in the December quarter, with a market capitalization exceeding Rs 48,000 crore.

This stringent action by RBI is reminiscent of previous penalties imposed on financial institutions like HDFC Bank, Mastercard, and American Express. However, the impact on Paytm is extensive, affecting online and offline merchant payments through nodal accounts.

One 97’s 49% stake in Paytm Payments Bank, as revealed in its IPO prospectus, indicates a significant reliance on the bank for various services. The regulatory action is not sudden, with Paytm Payments Bank under an embargo on new customer additions since March 11, 2022.