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RBI punished Paytm because of sharing information with China: Reports

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The reserve Bank of India (RBI) debarred Paytm Payments Bank, which processes transactions for India’s digital payments giant Paytm, from taking on new customers because it violated rules by allowing data to flow to servers abroad and didn’t properly verify its customers, Bloomberg reported early today, citing a source.

Annual inspections by the RBI had found that the company’s servers were sharing information with China-based entities that indirectly own a stake in Paytm Payments Bank, the person said, asking not to be identified as the details are private. Paytm Payments Bank is a joint venture between Paytm and its founder Vijay Shekhar Sharma. China’s Alibaba Group Holding Ltd. and its affiliate, Jack Ma’s Ant Group Co., own shares of Paytm, according to exchange filings.

An email to the RBI wasn’t immediately answered. Paytm didn’t respond to an email seeking comment.

In a statement late Friday, the RBI had cited “material supervisory concerns” for its action, without elaborating. Shares of Paytm, formally known as One 97 Communications Ltd., tumbled as much as 13.3% today.

While the RBI had similarly punished companies including American Express Banking Corp. and Mastercard Inc. for flouting data-storage rules, the concerns around Paytm Payments Bank are particularly sensitive given India’s hostile political relationship with China.

India has banned hundreds of apps linked to or originating from China over the past two years following a bloody clash at the nations’ disputed border. Paytm Payments Bank, being a regulated financial institution, was required to maintain a so-called service level agreement with its technology vendor that would ringfence the entity from its owners, the person said.

Paytm Payments Bank had also onboarded thousands of clients without adequate know-your-customer documentation and the concern was that some of these could have been mules for money laundering, the person added.

The regulator now wants Paytm Payments Bank to appoint a technology auditor in consultation with the RBI, the person said. The company is taking steps to comply with the RBI’s directive, including the appointment of an external auditor, the company said in a statement on Saturday. Existing customers will be unaffected.

The punishment will make it tough for Paytm Payments Bank to be upgraded to a small finance bank, limiting its ability to attract large deposits, according to Macquarie Capital analyst Suresh Ganapathy. ICICI Securities Ltd. cut its price target on Paytm to to 1,285 rupees from 1,352 rupees. The stock was trading at 691 rupees as of 3 p.m. in Mumbai Monday.

Paytm Payments Bank has over 300 million wallets and 60 million bank accounts, according to its website. The bank said it has over 100 million KYC-compliant customers and has been adding 0.4 million users every month.

Paytm denies charge in reports that cited RBI sources

Paytm Payments Bank (PPBL) on Monday denied media reports of leaking data to firms. The company termed the allegation as “false and sensationalist”. The bank, in a media statement, is assured to be fully compliant with Reserve Bank of India’s (RBI) data localisation rules. All of the bank’s data resides within India, the statement added.

According to the allegation made in the media report, Paytm Payments Bank servers have been accused of sharing information with firms, which also happen to own a stake in Paytm. Paytm is backed by China’s Alibaba Group Holding and its affiliate Ant Group.

In another development three days back, PPBL on March 11, was barred from adding new customers by the Reserve Bank of India, citing IT issues. PPBL said in a reply, “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.”

The Company has been informed that this does not impact any existing customers of PPBL, who can continue to use all banking and payment services without interruption. All existing users of Paytm UPI, Paytm Wallet, Paytm FASTag, and bank accounts can continue to use these instruments, including debit cards and net banking for payments.

The Paytm stock took a beating on the stock market after the RBI’s action on March 11, Friday. The stock price of One97 Communications, the parent company of Paytm plunges 13 per cent after the price of the share fell and hit a new low during the opening hours of Monday morning. The Paytm stock started its trade at ₹672 on the Bombay Stock Exchange (BSE).

The Data Protection Bill is in the works, which seeks to protect personal data of citizens and also intends to set up a Data Protection Authority.

The Trend Micro Cyber Risk Index report, published in August 2021, said that 73% of Indian organisations expect breach of data records in 2022. “Once again we’ve found plenty to keep Chief Information Security Officers (CISOs) awake at night, from operational and infrastructure risks to data protection, threat activity and human-shaped challenges,” said Vijendra Katiyar, country manager, India and SAARC, Trend Micro. “To lower cyber risk, organisations must be better prepared by going back to basics, identifying the critical data most at risk, focusing on the threats that matter most to their business, and delivering multi-layered protection from comprehensive, connected platforms.”

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