The Reserve Bank of India (RBI) last week ordered Paytm's banking unit, which powers most of the features of its popular digital payments app, to cease the majority of its operations from March 1 for "persistent non-compliance", sparking a $2.3 billion rout in the company's stock.

There are concerns about the broader impact on India's fin-tech sector which the government says raised $5.6 billion in 2022, as digital payments and the use of smartphones and the internet boomed. Foreign investors such as SoftBank and Tiger Global have bet on the space in recent years.

In their letter to the RBI, online travel agency MakeMyTrip, PolicyBazaar and 10 other entities asked authorities to reconsider their decision on Paytm, saying it "could send a negative signal to the global business community" and have "a chilling effect across the fintech sector, discouraging innovation and investment in a critical growth engine of the Indian economy".

The RBI, which cited "supervisory concerns" and non-compliance with rules as reasons for its decision, did not respond to Reuters request for comment on the letter.

Paytm, backed by SoftBank, has said it is confident of continuing operations and sources say it is holding talks with the central bank.

MakeMyTrip and PolicyBazaar declined to comment while Paytm did not respond to requests for comment.

Paytm's app is one of the most downloaded in India and its flamboyant CEO Vijay Shekhar Sharma is seen as the de facto leader of the startup space, once among India's 100 richest people.

Now, he arguably faces his biggest crisis in trying to save Paytm, which has 100 million monthly users and competes with the likes of Walmart's PhonePe and Google.

Paytm shares fell to a record low of 395 rupees early on Tuesday in Mumbai.

(Editing by Kirsten Donovan)

By Aditya Kalra and M. Sriram