The Reserve Bank of India (RBI) on Friday barred Paytm Payments Bank from on-boarding new customers with immediate effect, dealing a major setback to the Vijay Shekhar Sharma-led entity’s plan to convert into to a small finance bank.

Though the banking regulator cited “certain material supervisory concerns’’ behind its decision, it is not clear at this stage whether the clampdown on roping in new customers also extends to Paytm’s wallet business. If so, it would be a major blow, particularly at a time digital transactions are showing a strong growth.

The RBI said in a statement that the payments bank has also been directed to appoint an IT audit firm to conduct a comprehensive system audit of its IT system.

“Onboarding of new customers by Paytm Payments Bank Ltd will be subject to specific permission to be granted by the RBI after reviewing the report of the IT auditors,’’ the RBI added. The RBI took this action under Section 35A of the Banking Regulation Act, 1949.

This gives the central bank the power to give directions when it satisfied that it is in the interest of public interest or banking policy to prevent “the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or to secure the proper management of any banking company generally’’.

Paytm Payments Bank was incorporated in August 2016.