Why Has RBI Barred Kotak Mahindra Bank from Adding New Customers Online? What’s Next for the Lender?

Kotak Mahindra Bank cannot add new customers online or through mobile banking or issue fresh credit cards after the Reserve Bank’s directive. What exactly has the RBI said?

The RBI directed Kotak Mahindra Bank to “cease and desist”, with immediate effect, from “onboarding of new customers through its online and mobile banking channels” and “issuing fresh credit cards”. This was done under Section 35A of the Banking Regulation Act, 1949, which gives the RBI the power to direct banks “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”.

The ban will not impact existing customers and Kotak Mahindra Bank can continue to provide services to them, the RBI added.

The banking regulator had found serious deficiencies and non-compliance in areas of IT inventory management, patch and change management, user access management, vendor risk management, data security and data leak prevention strategy, business continuity and disaster recovery rigour and drill among others.

What Led to RBI Taking the Action?

The central bank said Kotak Mahindra Bank was found to be non-compliant with the corrective action plans issued by the RBI for 2022-23. “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 RBI said.

The RBI found during the investigations that Kotak Mahindra Bank is deficient in building operational resilience on account of its failure to build IT systems.

The RBI had held high-level engagement with the bank in the past two years with the view of strengthening its IT resilience, but the “outcomes were far from satisfactory”.

The central bank 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”.

RBI Action on Other Banks in the Past

HDFC Bank faced a similar action by the RBI when it was asked to put all new digital launches on hold till its technical issues are resolved. HDFC had to stop launching new digital products and services, and was barred from issuing credit cards as part of the penalty. Later, in August 2021, the RBI partially revoked the ban on the bank allowing it to issue new credit cards. Later in March, 2022, the bank informed the exchanges that the RBI has lifted the restrictions that were placed on the fresh digital launches of HDFC Bank.

Paytm Payments Bank (PPBL) also faced RBI’s heat when restrictions were imposed on it on January 31 over repeated violations of norms and non-compliance with rules. PPBL was barred from accepting fresh deposits and doing credit transactions after February 29. No further deposits or credit transactions shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, and National Common Mobility Cards (NCMC) after February 29, except for interest, cashbacks, or refunds. However, customers can withdraw or use their balance without restrictions till exhausted.

The RBI asked Bank of Baroda on October 10, 2023 to suspend on-boarding customers onto the ‘BoB World’ mobile application due to material supervisory concerns in the onboarding process. The bank had to suspend several officials allegedly involved in manipulating ‘BoB World’. Reports claimed that the bank had linked contact details of different individuals to inflate the number of mobile app registrations.

Bajaj Finance had to halt sanction and disbursal of loans under its two lending products ‘eCOM’ and ‘Insta EMI Card’ on RBI directions on November 15, 2023. This step was taken due to the company’s failure to adhere to the existing provisions of the Digital Lending guidelines of the RBI, particularly the non-issuance of Key Fact Statements (KFS) to the borrowers, the RBI stated. Additionally, Bajaj Fiancne announced the temporary suspension of the sanction and disbursal of new loans under ‘eCOM’ and ‘Insta EMI Card’.

The RBI also imposed a suspension on SBM Bank (SBM) India’s participation in transactions under the Liberalised Remittance Scheme (LRS). Subsequently, partial relief from these restrictions was granted on January 31, 2023.

The central bank also took strict action against Mahindra and Mahindra Financial Services on September 22, 2022, directing cessation of all recovery or repossession operations conducted via outsourcing arrangements.

Future of Kotak Mahindra Bank

The RBI action is likely to have “a detrimental impact” on the future of the bank, according to a report by The Economic Times. Its growth is likely to be impacted, so will its net interest margins, and fee income in the short to medium term.

Analysts have called RBI’s action against Kotak Mahindra Bank a “setback”. Brokerage firm Macquarie expects a medium-term de-rating for the bank. It stated that the ban of digital on-boarding will affect growth over medium-term. Macquarie highlighted that Kotak Mahindra Bank seems reluctant in opening branches and less than 350 branches being opened in the last four years is also an issue, as mentioned in a CNBC report.

Nomura sees limited impact on RBI curbs on the lender’s business and profitability. But it does see an adverse impact on the bank’s image. The brokerage also pointed the restrictions on the issuance of credit cards may impede with the bank’s medium-term objective of scaling up unsecured retail loans to mid-teens of its loan book.

CLSA also echoed Nomura’s views, and said the impact of RBI’s action on Kotak Bank’s profit is likely to be modest. It highlighted that the digital platform’s contribution to total savings deposits is only 8%.

Citi wants Kotak Mahindra Bank to focus on branch expansion, and said the RBI actions will adversely impact the lender’s growth, Net Interest Margin (NIM) and fee income.

Kotak Mahindra Bank Share Price Today

The bank’s share price plunged 10% to Rs 1,659 on Bombay Stock Exchange on Thursday. At 9:43 am, shares of Kotak Mahindra Bank were trading at Rs 1,658.25, down Rs 185.

Jefferies has cut its price target on Kotak Mahindra Bank to Rs 1,970 from Rs 2,050 earlier. The brokerage continues to retain its “hold” recommendation on the lender.