Indian central bank defends 'proportionate' action on Paytm

India's central bank said Thursday it takes supervisory actions and imposes business restrictions only after "persistent non-compliance" with rules, its first comment after a clampdown on Paytm last week has posed existential questions about the future of the leading financial services firm.

Shaktikanta Das, the Reserve Bank of India (RBI) governor, said the central bank always engages with regulated entities bilaterally and nudges them to take corrective action. If the central bank takes actions, "it is always proportionate to the gravity of the situation," said Das, pictured above, in a media briefing.

"All our actions, being a responsible regulator, are in the best interest of systemic stability and protection of depositors' or customers' interest," he added.

The Reserve Bank of India widened its curbs on Paytm’s Payments Bank, an associate entity of Paytm that processes transactions for the financial services group, barring it from offering many banking services, including accepting fresh deposits and credit transactions across its services. The regulator clarified that the payments bank unit is the only entity with issues.

“This is supervisory action for persistent non-compliance," the RBI deputy governor Swaminathan Janakiraman said at the media briefing. "Such action is invariably preceded by months and sometimes years of bilateral engagement where we point out the deficiencies but also give time to take corrective action. As a regulator, it is incumbent upon us to protect the consumer,” he added.

Shares of Paytm declined by 10% Thursday, shrinking its market cap to $3.4 billion. Paytm, which went public with a market cap of about $20 billion in 2021, was trading at $5.8 billion before the RBI's order last week.

A group of founders in India recently wrote to the regulator and the Ministry of Finance, cautioning that the central bank's action can impede innovation. Das said Thursday that the Reserve Bank of India will always "encourage and support innovation and technology in the financial sector."

The Reserve Bank of India plans to comment more on Paytm next week, the officials said. The central bank has weighed revoking Paytm Payments Bank's license in recent days, TechCrunch first reported last month.

It has also weighed ordering a board shakeup at Paytm Payments Bank and removing some of the company officials, including Paytm founder Vijay Shekhar Sharma, according to three people familiar with the matter.