By Chris Thomas, Ira Dugal and Siddhi Nayak

BENGALURU/MUMBAI (Reuters) – Indian digital payments firm Paytm lost a fifth of its market value on Thursday after the central bank ordered its payment bank subsidiary to halt its business, threatening the company’s profitability and the app it relies on.

The Reserve Bank of India (RBI) on Wednesday ordered Paytm Payments Bank to stop accepting fresh deposits in its accounts or popular digital wallets from March, raising worries over revenues from the company’s main payments business.

The RBI’s order could be a precursor to cancelling the bank’s license, a person familiar with the matter told Reuters.

The action against Paytm Payments Bank followed years of non-compliance with central bank rules, including on customer due diligence, use of funds and technology infrastructure, the source said.

Paytm, one of India’s largest payment firms, and the RBI did not respond to requests for comment.

Paytm’s stock fell to a six-week low of 609 rupees, erasing around $1.2 billion in value from the company also known as One 97 Communications. The stock was down 20%, at the bottom of an exchange-imposed trading band, marking its worst day since listing in 2021.

The bank, which houses all of Paytm’s 330 million wallet accounts, is important to the company’s app and wallet eco-system, which could be hit if Paytm cannot find banking partners to replace its payments bank.

PARTNERSHIP WORRIES

The app, competing with likes of Walmart’s PhonePe and Google’s GPay, lets users transfer funds, pay bills and maintain the digital wallets used across India to pay for everything from restaurant bills to vegetables.

The ubiquity of the app has allowed Paytm to forge partnerships with other financial players to sell insurance products, loans, credit cards and more.

The central bank order raises concern that Paytm’s lending partners might reconsider their relationships with the company, which owns 49% of the payments bank, analysts said. It could stall efforts by Paytm to attain profitability on a net basis.

“Private banks that were once gung ho on Paytm will now be cautious to take on new partnerships post the RBI flack,” said a banker with a midsize private bank.

Banks will demand a complete resolution of the RBI’s concerns before taking on any new partnerships with Paytm, said a banker at a state-run bank.

The bankers asked not to be named as they were not authorised to speak with the media.

Paytm said it would take steps immediately to comply with the RBI’s directions, and that it expects a worst-case impact of 3 billion to 5 billion rupees ($36 million-$60 million) to its annual earnings before interest, tax, depreciation and amortisation (EBITDA).

PAYTM MUST ‘RESTORE CREDIBILITY’

Paytm’s stock is trading at less than one-third of its listing price of 1,950 rupees, despite having climbed 20% last year. With Thursday’s plunge, the shares are down more than 4% this year.

Paytm founder and CEO Vijay Shekhar Sharma, who owns a 19.4% stake in the company and who dropped off Forbes’ billionaire list last year, lost about $233 million on Thursday as the shares cratered. He owns 51% of Paytm Payments Bank.

Sharma launched Paytm more than a decade ago and rose to fame after ride-hailing firm Uber made Paytm a quick payment option in India. Its use swelled in 2016 after India banned high-denomination currency notes, boosting digital payments.

Jefferies downgraded Paytm’s stock to “underperform” from “buy”, slashing its target price to 500 rupees from 1,050 rupees and saying regulatory and reputational issues could affect profitability.

JPMorgan cut Paytm’s rating to “underweight” from “neutral”, lowering its target price by one-third to 600 rupees.

“While we don’t believe that the order is an end of the road for Paytm, it materially impacts near-term growth, profitability, forces another pivot and necessitates it to restore credibility of durability of the business,” JPMorgan analysts wrote in a note.

Paytm counts Japan’s SoftBank and China’s Ant Financial among its early investors. Over the past year, SoftBank has reduced its Paytm stake, while Warren Buffett’s Berkshire Hathaway and China’s Alibaba Group have exited the company.