The Reserve Bank of India (RBI) on Wednesday barred private sector lender Kotak Mahindra Bank from onboarding new customers through its online and mobile banking channels, and from issuing fresh credit cards.
“The bank shall, however, continue to provide services to its existing customers, including its credit card customers,” the RBI said in a statement on April 24.
These actions were necessitated based on significant concerns arising out of the RBI’s IT examination of the bank in 2022 and 2023 and the bank’s continued failure to address these concerns in a comprehensive and timely manner, the RBI said.
“For two consecutive years, the bank was assessed to be deficient in its IT Risk and Information Security Governance, contrary to requirements under Regulatory guidelines,” the RBI said.
It said the business restrictions were being placed in the interest of customers and to prevent any possible prolonged outage which may seriously impact not only the bank’s ability to render efficient customer service but also the financial ecosystem of digital banking and payment systems.
Details of RBI’s Restriction On Kotak Mahindra Bank
In the absence of a robust IT infrastructure and IT Risk Management framework, the bank’s core banking system (CBS) and its online and digital banking channels have suffered frequent and significant outages in the last two years, the recent one being a service disruption on April 15, 2024, resulting in serious customer inconveniences.
“The bank is found to be materially deficient in building necessary operational resilience on account of its failure to build IT systems and controls commensurate with its growth,” the banking sector regulator said.
In the past two years, the Reserve Bank has been in continuous high-level engagement with the bank on all these concerns with a view to strengthening its IT resilience, but the outcomes have been far from satisfactory. It is also observed that, of late, there has been rapid growth in the volume of the bank’s digital transactions, including transactions pertaining to credit cards, which is building further load on the IT systems, the RBI added.
In 2020, the RBI had also taken a similar action against India’s largest lender HDFC Bank for a series of technical glitches it experienced for the previous two years. The central bank had put temporary restrictions on the bank’s new digital banking launches and proposed business-generating IT applications until it resolves the outage issues.
It had also temporarily barred HDFC Bank from onboarding any new credit card customers. However, the central bank relaxed the restriction on the onboarding of new customers by HDFC Credila in June 2023.
Impact on Kotak Mahindra Bank’s Shares
After the RBI’s action against the bank, the shares of Kotak Mahindra Bank on Thursday are likely to fall. On Wednesday, its shares rose Rs 29.8 or 1.64 per cent to close at Rs 1,843.05 apiece on the BSE. Today, Shares of Kotak Mahindra Bank ended at Rs 1842.95 apiece on BSE, up 1.65 per cent from previous close, while benchmark sensex ended nearly flat.
What Analysts Say On RBI’s Action On Kotak
Jyoti Prakash Gadia, managing director at Resurgent India, said, “The RBI’s restrictions on Kotak Mahindra Bank in respect of fresh onboarding of new customers through online mode and mobile banking and issuing credit cards is indicative of the significant importance that the RBI is laying on the need to have strong and sustainable information technology (IT) systems in the context of the current growth of digital banking.”
She added that while such new-age private banks had set up good IT systems in the initial stages to create a niche market for them to attract new customers, upgradation of IT systems as the business grows is of utmost necessity to ensure the required standards IT security and customer service.
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