RBI Puts Restrictions on Kotak Mahindra Bank’s Online Services and Credit Card Issuance

In a move to uphold compliance and safety in the financial sector, the Reserve Bank of India (RBI) has announced significant restrictions on Kotak Mahindra Bank. On April 24, 2024, the RBI prohibited Kotak Mahindra Bank from onboarding new customers through its online and mobile banking channels, and from issuing fresh credit cards. This action, following the recent closure of Paytm Payment Bank, underscores the RBI's commitment to maintaining stability and security within the country's financial landscape.

The decision stems from concerns raised during the RBI's IT examinations of the bank in 2022 and 2023, coupled with the bank's failure to address these concerns adequately and promptly. Specifically, the RBI highlighted deficiencies in Kotak Mahindra Bank's IT Risk and Information Security Governance for two consecutive years, contrary to regulatory guidelines.

While the bank will continue serving its existing customers, including credit card holders, these restrictions are implemented to safeguard customer interests and prevent potential prolonged outages that could disrupt not only the bank's services but also the wider digital banking and payment ecosystem.

Root Cause

The root of the issue lies in Kotak Mahindra Bank's IT infrastructure and risk management framework, which have proven inadequate to support its operations. The bank's core banking system (CBS) and digital banking channels have experienced frequent and significant outages over the past two years, with the latest disruption occurring on April 15, 2024, causing significant inconvenience to customers.

RBI's Stance

The RBI emphasises that Kotak Mahindra Bank's operational resilience is compromised due to its failure to develop IT systems and controls commensurate with its growth. Despite ongoing engagement between the RBI and the bank to address these concerns, satisfactory outcomes have not been achieved. Moreover, the rapid growth in the volume of the bank's digital transactions, including credit card transactions, has further strained its IT systems.

Comparison with Past Actions

This is not the first time the RBI has taken such action against a bank. In 2020, HDFC Bank faced similar restrictions following technical glitches experienced over two years. The RBI temporarily restrained HDFC Bank from launching new digital banking services and business-generating IT applications until the issues were resolved. Additionally, the bank was barred from onboarding new credit card customers. While restrictions were relaxed for certain services in June 2023, the RBI's vigilance remains evident.

Impact on Shares

The impact of the RBI's actions on Kotak Mahindra Bank's shares is expected to be significant. While the bank's shares saw a modest increase on Wednesday, rising by 1.64% to close at Rs 1,843.05 apiece on the BSE, Thursday's trading session is likely to see a decline in response to the regulatory measures.

Conclusion

In conclusion, the RBI's actions against Kotak Mahindra Bank underscore the importance of robust IT infrastructure and risk management in the banking sector. While these restrictions may pose challenges for the bank, they are essential for ensuring the stability and security of the financial system. Moving forward, Kotak Mahindra Bank will need to address the underlying issues identified by the RBI to regain the regulator's confidence and resume normal operations.