PayPal does not have authorization in India to provide cross-border money transfers, a spokeswoman for the country's central bank said on Thursday.
PayPal needs authorization to operate a cross-border money transfer service, under the country's Payment and Settlement Systems Act, Alpana Killawala, spokeswoman of the Reserve Bank of India (RBI), said Thursday.
In a Tuesday blog post PayPal said that the suspension of personal payments to and from India would continue for at least a few months until it resolves questions from Indian regulators.
"We temporarily suspended these services to respond to enquiries from the Indian regulators, specifically questions on whether personal payments constitute remittances into India," the blog post said.
PayPal notified users on Saturday, through another blog post, that personal payments to and from India, as well as transfers to local banks, had been suspended. Customers can still make commercial payments to India, but merchants can't withdraw funds in rupees to local banks, the company said.
By Tuesday, PayPal said customers should be able to withdraw funds to a local bank within a few days.
The Payment and Settlement Systems Act of 2007 stipulates that no person other than the RBI can commence or operate a payment system, except with an authorization issued by the RBI.
Existing payment systems would cease to have the right to carry on their operations, unless they obtained an authorization within six months from the commencement of the act in August 2008.
The act also provides for RBI's audit and inspection of the operation of authorized payment systems.
As of Jan. 31, Western Union and MoneyGram were among the payment systems operators authorized to carry out customer-to-customer, cross-border money transfer into India.
PayPal did not immediately respond to a an e-mail request for comment on why it had not sought RBI authorization.
The online payment company may also have to tighten its verification of users of personal accounts in India to meet new government regulations relating to curbing money-laundering, according to an analyst who declined to be quoted. Killawala declined to comment.
The Indian government is worried that intermediaries like PayPal are being used by freelancers who do not pay income taxes for income earned abroad, and also by financiers of terrorists in India, the analyst added. PayPal is popular in India with freelance software developers and content providers.
The move by PayPal has inconvenienced a number of its customers who receive payments from abroad through PayPal. The company has come in for criticism on various Web sites, including its blog.
"It's a shame PayPal is doing this now. You would believe a company as big as them would sort out such issues before they began offering their service," said a post from a user named Gaurav on PayPal's blog.