Will the Reserve Bank of India (RBI) allow the crisis-ridden Paytm Payments Bank Ltd (PPBL) to shut shop? Unlikely, going by the innovative ways it has employed since 2020 to resolve distress in the banking system.

Also read: Paytm Founder and CEO Vijay Shekhar Sharma steps down from Paytm Payments Bank board

It may be pertinent to note that the central bank had invoked Section 35A of the Banking Regulation (BR) Act for taking action against the erstwhile Punjab and Maharashtra Co-operative (PMC) Bank in 2019, erstwhile Lakshmi Vilas Bank (LVB) and Yes Bank (both in 2020). 

But, the aforementioned banks were rescued either through amalgamation (PMC Bank with Unity Small Finance Bank and LVB with DBS Bank India or reconstruction. Yes Bank received ₹10,000 crore equity infusion from SBI, erstwhile HDFC, ICICI Bank, Axis Bank, Kotak Mahindra Bank, Federal Bank, Bandhan Bank and IDFC First Bank).

Ownership change or amalgamation?

Now, RBI has invoked Section 35A of the BR Act to crack the whip on PPBL. Given the central bank’s past record of not allowing troubled banks (except small urban co-operative banks) to be liquidated, banking experts say PPBL could either see a change of ownership or amalgamation with another player in the same space.

That PPBL’s reconstituted Board has been packed with ex-bankers and bureaucrats as independent directors is probably an indication that one of two aforementioned scenarios may play out.

The Bank’s board has been reconstituted with the appointment of Ex-Central Bank of India Chairman S Sridhar, retired IAS officer Debendranath Sarangi, former Executive Director of Bank of Baroda Ashok Kumar Garg and retired IAS officer Rajni Sekhri Sibal.

Besides the aforementioned appointments, PPBL’s board has former Executive Director of Punjab & Sind Bank Arvind Kumar Jain as Independent Director and Surinder Chawla, MD & CEO.

One 97 Communications Ltd (OCL), which owns 49 per cent stake in PPBL, has withdrawn its nominee from the Bank’s Board, with Vijay Shekhar Sharma, who owns 51 per cent stake in PPBL, stepping down as Part-Time non-executive Chairman and Board member.

Invoking Section 35A of the BR Act

In its January 31, 2024, order invoking Section 35A of the BR Act against PPBL, RBI observed that the Comprehensive System Audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action. The Central Bank asked the Bank to stop onboarding new customers with immediate effect.

Under Section 35A of the BR Act, the RBI can issue directions to a banking company to prevent its affairs being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or to secure the proper management.

Further, the Reserve Bank, may, on a representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit.

Resolving distressed institutions

In a December 2022 speech, then RBI Deputy Governor MK Jain, observed that even before the onset of the pandemic, RBI had used innovative ways in resolving distressed institutions without requiring infusion of tax-payer money, while safeguarding depositor interest.

Instead of applying traditional template of merger of a weak bank with a strong domestic bank or Government bailing out a bank, innovative approaches were adopted, he added.

Also read: Paytm ready for all options for bank’s survival, including acquisition

“In the case of Yes Bank, a group of banks came together to infuse capital to revive the bank. In the case of Punjab and Maharashtra Co-operative Bank, a market-based resolution through the expression of interest route was used. For, Lakshmi Vilas Bank, a foreign bank, albeit through wholly owned subsidiary route, was allowed to acquire the operations,” Jain then said.