Issues with RBI’s decision in the PayTM case – Banking laws and regulatory shake-ups

Source: This post on the Issues with RBI’s decision in the PayTM case has been created based on the article “Banking laws and regulatory shake-ups” published in “Business Standard” on 16^th February 2024.

UPSC Syllabus Topic: GS Paper 2 Indian Polity – Statutory, regulatory and various quasi-judicial bodies.

News: The article discusses the issues with RBI’s decision in the PayTM case. It also highlights the principles that should be followed by regulatory bodies in such cases.

Background:

Reserve Bank of India (RBI) recently directed the Paytm Payments Bank Ltd (PPBL) to stop onboarding customers with immediate effect, thereby essentially stopping the operations of the PPBL. Paytm Issue with RBI

What are the issues with RBI’s decision in the PayTM case?

1. There was no formal legal order from the RBI setting out the failures and the justification for the action.
2. There is no information on whether a hearing took place, PPBL’s side of the story and RBI’s rebuttal of PPBL’s defence is not known.
3. It is unclear whether due process and rule of law principles were followed by public authorities before imposing punitive actions.

According to the author, a possible reason for lack of transparency in this case can be that it could cause a bank run.

What principles should be followed by regulatory bodies in such cases?

1. Rule of law: The term “rule of law” is about equal treatment of everyone, with the same set of laws and fair procedures in the legal process.
2. Natural justice: It has two basic elements:
   a. No person should be judged without a fair hearing, providing the person the opportunity to respond to the evidence against her.
   b. No one should be a judge in her own cause.

A modern market economy requires these concepts to be operational, because arbitrary exercise of state power is unfair and deters private investment.

Read More UPSC Topics-

What should be the way forward?

1) Revisiting Old Laws: For instance, in this case, Section 35A of the Banking Regulation Act effectively instructs the RBI to do the things that were done. These old laws need to be revisited.

2) Modern Law Required: India needs a modern Banking Regulation Act, one that would ensure that the rule of law and natural justice apply fully in regulatory enforcement matters, whenever authorities engage with financial firms.

Question for practice:

What are the issues with RBI’s decision in the PayTM case? What principles should be followed by regulatory bodies in such cases?