For Indian regulators looking to crack down on potential fraud in the financial sector, Paytm may be just the beginning.

India shocked investors last month by abruptly halting most operations of the banking arm of Paytm, a once high-profile fintech star that attracted the backing of Warren Buffett and SoftBank Group. While the Paytm case was an extreme example of lapses in customer verification — it allegedly used a single identity document to open thousands of accounts — the crackdown signals growing impatience on the part of authorities.

Hardly a day goes by when a bank or fintech firm isn’t fined for failing to properly vet its customers, dragging down top lenders from State Bank of India to Citigroup. Tired of persistent shortfalls, the Reserve Bank of India is likely to tighten further before Governor Shaktikanta Das’s planned term ends this year.

“The RBI has enough tools and the punishment is just the beginning,” said Prakash Agarwal, founder of Gefion Capital Advisors. He said the fines served as a “symbolic warning of more serious measures to come, such as action against Paytm Bank”.

Regulatory concerns are mounting as lenders rush to open more accounts and build up deposits to meet growing demand for loans in the fastest-growing major economy. Most banks typically outsource the last mile of customer verification to third-party firms, or so-called runners, and information leakage occurs at many points in this largely paper-based process, according to Ashok Hariharan, CEO of IDfy, which provides verification services customers of banks and fintech companies in India.

While big banks can do more, it’s challenging to deal with firms that don’t have robust fraud and risk teams, he said.

RBI Governor Das has repeatedly warned about the need to strengthen risk management in banks and shadow lenders. Although bad debts are at their lowest in more than a decade, these gaps in customer verification are among the central bank’s main concerns.

“The interest of depositors and customers is paramount,” Das said at a post-monetary policy briefing this month. “Financial stability is paramount.”

While Indian banks have increased spending on technology to detect potential money laundering and prevent fraud, cases are on the rise. The number of frauds reported for more than Rs. 100,000 ($1,205) rose 68% to more than 14,000 from April to September last year, almost three times the pace of the previous six-month period, according to an RBI report. The sharpest growth in fraud cases is in credit cards, online transactions and deposits, the data show.

RBI, which can impose a maximum penalty of Rs. 50 million for violations, imposed fines of Rs. 400 million in the fiscal year that ended in March, down from Rs. 650.3 million the previous year. However, the frequency of such fines has increased sharply in the current fiscal year, as can be seen from the central bank’s website.

“The right thing for RBI to do in terms of KYC is and people will take it seriously now,” said IDfy’s Hariharan. “KYC is taken lightly in many cases.”

Customer data in the country has been misused, according to Hariharan. In a typical setup, fraudsters pay runners who collect so-called Know-Your-Customer documents for bank customers and offer them just Rs. 500 for the data, he said. This allows fraudsters to run multiple bank accounts from identity theft, and they collect money in those accounts by misleading customers largely through phishing calls, he added.


In addition to its crackdown on banks, the RBI ordered Visa this month to immediately suspend a payment service where cards were used for transactions with merchants not authorized to accept such payments.

Yet no recent case has drawn as much attention as Paytm, controlled by billionaire Vijay Shekhar Sharma. The firm hit the Indian stock markets in 2021 with a $2.5 billion (roughly Rs. 20,737 crore) initial public offering, the country’s largest ever, and attracted a who’s who of global investors. Masayoshi Son’s SoftBank jumped in, as did Chinese fintech giant Ant Group and the Canada Pension Plan Investment Board.

Its subsidiary, which accepts deposits and offers payment services, like PayPal Holdings, has been under the regulator’s sights. On January 31, India’s central bank barred Paytm Payments Bank from accepting new credits to its customer accounts or mobile wallets after February 29. Bloomberg News reported that hundreds of thousands of customers have not submitted their KYC documentation.

RBI’s move dealt a big blow to Paytm and sent its stock tumbling. Last week, regulators extended that deadline to March 15, and Paytm is in talks with other banks to clear merchant payments.

Compliance and accountability are big challenges for the financial system, which now includes many connections between banks, fintech and others, according to KV Karthik, who heads the financial services sector for Deloitte in India.

“With such a rapid growth of so many small fintech firms in the ecosystem, the RBI probably wants to send a strong and clear message that everyone needs to follow the rules very seriously,” said Agarwal of Gefion Capital.

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