On April 24, the Reserve Bank of India (RBI) issued a significant directive to Kotak Mahindra Bank, restricting the bank from onboarding new customers via online and mobile banking channels and halting the issuance of new credit cards. This decision, however, allows the bank to continue servicing its existing customer base, including those holding credit cards.

Reasons Behind RBI’s Decision

The restrictions stem from findings during the RBI’s IT examinations conducted in 2022 and 2023, which highlighted Kotak Mahindra Bank’s continuous inadequacies in addressing IT risks and information security governance. These deficiencies are in violation of the regulatory guidelines and have raised significant concerns about the bank’s operational resilience and IT infrastructure.

Specific Areas of Concern

The RBI noted that Kotak Mahindra Bank had experienced frequent and significant outages over the last two years, impacting its core banking system (CBS) and online and digital banking channels. The most recent disruption occurred on April 15, 2024, leading to substantial customer inconvenience.

Regulatory Perspective

The RBI has engaged with Kotak Mahindra Bank at high levels over the past two years, aiming to bolster the bank’s IT resilience. However, these efforts have not yielded satisfactory results. Moreover, the bank’s rapid growth in digital transactions, including credit card operations, has further stressed its IT systems.

Comparison with Past Incidents

This action mirrors the RBI’s past approach with HDFC Bank, which faced similar restrictions in 2020 following technical glitches. The restrictions were partially lifted for HDFC Credila in June 2023, indicating a possible pathway for resolution for Kotak Mahindra as well.

Market Impact

The market reacted to the RBI’s announcement with uncertainty about Kotak Mahindra Bank’s future performance. On the day following the announcement, the bank’s shares are expected to decline, contrasting with the previous day’s rise of Rs 29.8, or 1.64%, to Rs 1,843.05.

Expert Analysis

Jyoti Prakash Gadia, Managing Director at Resurgent India, emphasized the critical nature of robust IT systems for banks, especially as digital banking continues to grow. She pointed out that while new-age private banks like Kotak Mahindra initially established competent IT frameworks, continuous upgrades are essential to maintain security standards and customer service quality.

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