Dollar payments by thousands of small and medium Indian businesses have been stuck over the last three weeks, after US online payments company PayPal suspended payment transaction to and from India over regulatory issues. PayPal’s move followed questions from the Reserve Bank of India (RBI) about whether the US firm complies with laws on cross-border money transfers. Over 7,000 complaints, from customers who are unable to trace their money, have flooded internet portals and blogs.
On January 28 this year, the RBI clamped down on PayPal for carrying out interbank money transfers without a requisite licence. PayPal, which manages over 190 million accounts in 194 countries, responded by suspending monetary transfers to and from India, a move that has affected 30,000-40,000 businesses and individuals. Even as the outage is likely to continue in March, PayPal India officials were inaccessible for comment. Neither Farhad Irani, PayPal’s Asia Pacific head, responded to an e-mailed questionnaire nor eBay India’s spokesperson.

Meanwhile, small businesses are bearing the brunt of the impasse. Mahendra Sharma, chief executive of IT companies in India, a Web solutions company, had requested withdrawal of $6,500 made to a US client via his PayPal account. “I assume it is nowhere in the system, because till date, I am unable to trace it; it is neither in my PayPal account nor in my bank. PayPal simply apologises for the inconvenience and says that it is ‘working on it’, but has no clear explanation to offer,” Sharma fumed. PayPal users were first told on February 3 that the portal was in the process of upgrading its systems.

Krithika, a director with Chennai-based website design firm Anis Info Web, is yet to trace her $2,000, transacted to a US client on February 1. “They promised to reverse the money to my bank account which they didn’t. It’s not there in the PayPal account either. There is no clear time window on when I will get to know the fate of my money.”

PayPal has become the standard mode for making payments and withdrawals to many Indian SMBs and freelance programmers, bypassing the high processing fees of conventional banking channels. Companies noted that banks typically charge between $40-$50 as transfer fees per $1,000 transacted. Making a snappy money transfer via credit card on PayPal was viewed as a cheaper and better option.

According to users of PayPal, while the portal does not have investment bank status, it has been performing the functions of an investment bank. “If they did not have the RBI approval for conducting bank-to-bank transfers, why did they start money transfer operations? In the event of them going ahead with processing business transactions and charging fees for the same, RBI should have stopped them early on. Too many transactions are blocked, with absolutely no clarity on payment and withdrawal status,” said the CEO of a trading company, who finds himself unable to access the $15,000 which he sent via PayPal earlier this month.

Defining himself as a “creditor” in a purely legal sense, the CEO said that PayPal users are likely to form pressure groups to press their case with the RBI. “We are unable to understand PayPal’s reticence and lack of transparency with customers.”

Saurabh Bhandari, CEO of Indore-based Flair Solutions, said, “My money with them is untraceable at present, and my complaints are still unresolved. Practically anybody in India who does business with small clients in the US have been using PayPal because they trust them. But this trust is disappearing.”

“We are working on a consensus among affected users and exploring legal options, if the status of the money remains unclarified by PayPal,” added Sharma, who has written to the RBI’s Mumbai branch for a clarification on the issue.

- Business Standard

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