L’affaire Paytm has once again brought to fore the debate on why financial discipline and regulations are more important to banks than for other industries. Indira Gandhi rolled out the process of bank nationalisation in 1969 at the height of her socialistic deal so that banks could serve the poor more and the incestuous practice of industrial houses using their own banks’ funds to further their own causes including diversion of funds was foiled. For the same reason, two years later ie, in 1971 she nationalised the general insurance business by consolidating the private ones into four regional insurers — namely United India based in Chennai, Oriental based in Delhi, National based in Kolkata and New India based in Mumbai with General Insurance Corporation parenting all the four.
It is moot if what she did served the purpose they were supposed to, but it certainly gave rise to behest lending whose most blatant version was “phone banking” as Prime Minister Narendra Modi puts it with a wicked sense of humour especially in election rallies with a particular reference to how the fugitive Vijay Mallya bent the system to get the government to throw good money after the bad to his now grounded Kingfisher Airlines Ltd. The dangerously rising spectacle of non-performing assets (NPA), a euphemism for bad debts, was engendered as much by behest lending as by the politically more popular loan melas both of which promoted the smug notion that such loans from banks were not meant to be repaid!
After liberalisation in the early nineties of the previous century, wisdom dawned on the policy wonks and the government that nationalisation after all was an inappropriate solution to a genuine problem of lopsided lending. The UPA government’s blue-eyed boy Raghuram Rajan, the then RBI governor, warmed up to the idea of a payments bank in 2013, and thus was born the first payment bank of Bharti Airtel. Payments banks give many attractions to their customers including the convenience of mobile number doubling as savings account number, nil minimum balance, cash back and what have you. Paytm Wallet and its sister company Paytm Payments Bank Ltd made the most of the void left by the demonetisation of Rs 1000 and Rs 500 notes announced on November 8, 2016 by Prime Minister Modi. That payments banks can but accept deposits of a maximum of Rs 1 lakh and couldn’t lend nor issue credit cards made them hermaphrodite banks if one may say so, given the fact that lending is the second arm of any bank with the first being acceptance of deposits. Soon payment banks were bestowed with the description of fintech firms as they were mobile-driven.
Payments banks were a perfect fit in a milieu where the mobile phone jettisoned many gadgets and utilities including cameras, calculators, wallet and even bank passbook and cheque book.
Paytm and other mobile wallets are different from Google Pay or Gpay in a vital sense — in Gpay you pay from your bank account linked to your Gpay app in your mobile but Paytm is a wallet to which you transfer money from your bank account which more often than not is from your Paytm Payments Bank thus allowing the wallet company the luxury of float or interest-free funds from the date of transfer to utilisation.
It now turns out from the recent RBI crackdown on Paytm Payments Bank Ltd that the idea of a payments bank was flawed as the rump model of business, as it were, engendered by wrenching away of the freedom to lend, has been tempting them to follow some sharp practices including playing the handmaiden role in money-laundering. It is suspected that the auditors found thousands of accounts in the Paytm Payment Bank opened on the back of the same Aadhaar number.
The popular perception that anything routed through banking channels is deemed to be white money was busted when in October 2016 as many as 2 lakh bank accounts of shell companies were frozen by the government. While there is no stopping shell companies from opening bank accounts, it is perfectly kosher for the authorities to look into the dealing of such companies which are often opened for money laundering whose main adjunct is multi-layering ie, building wheel within wheel set of arrangement to frustrate investigation what with the trail often disappearing into foreign bank accounts with banking secrecy law thrown in.
Payment bank or regular full-fledged bank, they are both amenable to misuse and abuse. Yes Bank is a full-fledged bank whose promoter Rana Kapoor was derisively called the lender of the last resort — wannabes denied loans by other banks went to him and got the loan sanctioned for a quid pro quo was the ED’s charge against him.
RBI cannot be faulted for cracking the whip on Paytm Payments Bank by asking it to cease all business from March 1. A bank is like the proverbial Caesar’s wife — should be beyond reproach and suspicion. Bank failures have a ripple or contagion effect which is why the government orders bailout as it did for Yes Bank. In its absence, the health of other banks which have lent to the failed bank is also impacted. Exemplary punishments must be prescribed for banks deviating from the straight and narrow of banking norms. While behest lending has indeed slowed down under the Modi government, onboarding of dubious accounts hasn’t. It is time the riot act was read out to all banks. After all, we are not Switzerland where the Swiss law itself winks at banking secrecy and duplicity.
S Murlidharan is a freelance columnist and writes on economics, business, legal and taxation issues
