Need for legislative and regulatory changes in the banking sector

- Before the Reserve Bank's action, Paytm Payment Bank had over 3 crore accounts, over 3.5 crore OUI codes and over 30 crore wallets linked.

The Reserve Bank of India has banned Paytm Payments Bank from adding new customers with immediate effect. Existing customers were allowed to withdraw or access balances from all their accounts, but did not allow additional deposit or loan transactions. Now after March 15, no other banking services can be provided by Paytm Payments Bank. Essentially, RBI has stopped the operations of Paytm Payment Bank. The question is, why was this done? Reserve Bank does not take action without any reason and without any justification. Paytm Payments Bank has committed a serious regulatory violation that warrants a stern response. It is likely that there have been many small-scale violations in the past. We can also speculate that the top management of Paytm Payments Bank was informed about the violations and given an opportunity to correct their past mistakes. But these are all speculations and we don't know much about it.

The rationale behind the Reserve Bank's crackdown on Paytm Payments Bank is beset with questions. To justify this action, the RBI has not yet issued any formal legal order explaining its failure and justification of the action. A comprehensive accounting report by the external auditors and a subsequent compliance verification report revealed persistent non-compliance and ongoing oversight concerns at the bank, requiring further monitoring, the press release said. This statement leaves many questions unanswered.

The smooth functioning of a modern market economy requires the rule of law and fair procedures. Unregulated governance is not only unfair, but also discourages private investment. Is it possible that banking is different from other sectors, in which case the foundation of constitutional law should be removed from this sector. Recent examples of banking regulation in countries like the US and the UK clearly show that the banking sector can function while adhering to the rule of law and constitutional values.

Another possibility is that if the RBI were to show more transparency in these matters, it could create a panic among depositors as they rush to withdraw their deposits. In such a situation, it is argued that the rule of law process is not suitable for regulating and supervising banks. But this argument cannot be made here. Before the RBI action, Paytm Payments Bank had over 3 crore accounts, over 7 lakh point-of-sale terminals. Also, over 3.5 crore UPI QR codes and over 30 crore wallets were linked to Paytm Payment Bank.

Additionally, around 1 crore FASTags on Indian roads belong to Paytm Payment Bank. All these will be affected by RBI action. Because all these users don't know what went wrong with Paytm Payment Bank and they only see strict action by RBI. In such a situation, panic may set in and bank deposits may be withdrawn only because of the RBI's action. Apart from this, there are also rumors in the market that Paytm Payments Bank is not alone, many new financial companies are also facing pressure.

The question is who should be held responsible for this crisis? Section 356 of the Banking Regulation Act effectively requires him to do what he has done. RBI employees are following the old law which is mandatory for them to follow. Now is the time to rethink these old laws. This is part of the institution building journey of India's modern economy. An example of this is the Securities and Exchange Board of India (SEBI) where the concept of 'express order' (with reasons) has resulted in two developments namely the enactment of the SEBI Act, 1992 as a modern law and the establishment of the Securities Appellate Tribunal. which provides judicial oversight of SEBI's actions. Similarly, India needs a modern banking regulatory law that ensures that the rule of law and natural justice are fully applied in regulatory enforcement matters whenever authorities deal with financial institutions.