Uday Kotak Loses Rs 10,000 Crore In A Day After RBI's Action On Kotak Mahindra Bank
Kotak Mahindra Bank has now lost its status as India's?fourth-largest bank after facing a significant setback recently when the Reserve Bank of India (RBI) imposed a ban on the bank from onboarding new customers through its digital channels and issuing fresh credit cards. This unexpected action had an instant impact, especially on the share price of the bank and its billionaire founder, Uday Kotak.
Why has RBI taken action against Kotak Mahindra Bank?
On April 24th, the Reserve Bank of India (RBI) instructed Kotak Mahindra Bank to stop signing up new customers online and issuing new credit cards. But don't fret, existing customers won't be affected. The RBI said, "The bank will still serve its current customers, including those with credit cards."
Why did the RBI do this? Because they're worried about how the bank follows rules and handles risks. They've been looking at the bank's IT (information technology) systems since 2022 and found some big problems. The bank didn't fix these problems properly and on time. They had trouble managing IT things like updates, who can use systems, and keeping data safe.
For two years, the bank didn't meet the rules for handling risks and keeping information safe. Even after being told to fix things, they still got it wrong. Later checks showed the bank wasn't doing what it should to fix these issues. Their efforts to meet rules weren't good enough.
The RBI also mentioned that Kotak Mahindra Bank's online systems had many problems in the last two years, including a big one on April 15th. Customers couldn't use bank services for nearly 12 hours. This happened because the bank's IT and risk management weren't strong enough.
In the last two years, the number of digital transactions through the bank has gone up a lot, especially with credit cards. This made the bank's IT systems struggle.
To protect customers and the banking system, the RBI put restrictions on the bank's business. These will be checked again after an outside review that the bank will set up with RBI's okay. The bank has to fix any problems found in this review or during RBI checks. And these restrictions won't stop any other actions the RBI might take against the bank.
KMB response
In response, the Bank said, "adoption of new technologies to strengthen its IT systems and will continue to work with RBI to swiftly resolve balance issues at the earliest."
Uday Kotak loses Rs 10,000 crore
The announcement led to a sharp decline in Kotak Mahindra Bank's share price, plummeting by as much as 13% and wiping out a substantial portion of its market capitalization on Thursday. Shareholders bore the brunt of this downturn, with losses amounting to billions of rupees overnight. Uday Kotak himself, holding a 26% stake in the bank, saw a staggering loss of around $1.3 billion (Approx Rs 10,000 crore) in a single day. His net worth was $14.4 billion as of April 24 which is now at $13.1 billion as of April 26, according to the Bloomberg Billionaires Index.
The ban on onboarding new customers via digital channels poses a significant challenge for Kotak Mahindra Bank, which has been heavily reliant on such channels for its growth strategy. With almost 98% of transaction volume in savings accounts occurring through digital or non-branch methods, the impact on the bank's growth trajectory could be substantial.
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Moreover, the regulatory action by the RBI has wider implications beyond just the financial aspect. It raises concerns about governance and risk management practices within the bank, particularly related to its technology systems. The central bank cited deficiencies and non-compliance in various processes over two years, highlighting issues ranging from data security to vendor risk management.
For Uday Kotak, this regulatory setback comes at a pivotal moment. Having built Kotak Mahindra Bank over decades into Asia's richest banker, he now faces one of his biggest tests yet. The ban not only dents his wealth but also underscores the challenges of maintaining regulatory compliance and technological robustness in the rapidly evolving banking landscape.
The timing of this regulatory action is noteworthy, considering that earlier this year, Kotak Mahindra Bank appointed a new Chief Executive Officer, Ashok Vaswani, who took over the reins at the beginning of the year, emphasised the importance of scale and technology in driving the bank's growth agenda. However, the RBI ban presents an immediate obstacle for him to navigate.
On April 25th, Ashok Vaswani stated that the bank is actively dealing with the issues raised by the Reserve Bank of India (RBI) regarding the bank's technology problems. He mentioned that the bank is in regular contact with the regulator to sort out these issues.
Kotak Mahindra Bank's deposits in current and savings accounts dropped to 47.7% in the third quarter finishing December 2023, down from 53.3% the previous year. A report by Emkay suggests it could dip further to 47.2% by the end of FY25, after a probable decrease to 47.8% in the fourth quarter ending March 2024. The bank is set to reveal its fourth-quarter results on May 4. Additionally, the net interest margin was recorded at 5.22% on December 31, 2023, but Emkay predicts it might slip below 5% by FY25.
Kotak Mahindra Bank loses the title of fourth largest bank
Kotak Mahindra Bank, known for its strong risk management and governance, has dropped to fifth place in market value compared to rival Axis Bank. Axis Bank's stock rose by 4% due to better-than-expected Q4 results, while Kotak's fell by 10% after RBI banned adding new customers digitally and issuing new credit cards. This led to Kotak's market value decreasing to Rs 3.3 lakh crore, while Axis Bank's rose to Rs 3.4 lakh crore. HDFC Bank remains India's top-valued bank, followed by ICICI Bank and SBI. Over the years, Kotak surpassed Axis, but investor concerns over succession and regulatory issues have caused its stock to drop. The recent RBI ban worsened the situation, with analysts fearing further decline if issues aren't resolved soon. Kotak aims to enhance IT systems and address RBI concerns within 6-12 months.
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(Disclaimer: The information provided in this article is for educational and informational purposes only. It does not constitute financial or investment advice, and readers are advised to conduct their own research or consult a financial advisor before making any investment decisions.)
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