RBI Bars Kotak Mahindra Bank From Onboarding New Customers Online And Issuing New Credit Cards, Here¡¯s Why

On Wednesday, April 24, the Reserve Bank of India (RBI) Instructed Kotak Mahindra Bank to stop onboarding new customers through online banking, and mobile banking, and to stop giving out new credit cards. But don't worry this action will not affect existing customers. RBI said in the statement "The bank shall continue to provide services to its existing customers, including its credit card customers.". This action was taken because the RBI is concerned about how the bank follows rules and manages risks. In the press release yesterday, RBI said, ¡°The Reserve Bank of India has today, in the exercise of its powers under Section 35A of the Banking Regulation Act, 1949, directed Kotak Mahindra Bank Limited (hereinafter referred to as 'the bank') to cease and desist, with immediate effect, from (1) onboarding of new customers through its online and mobile banking channels and (II) issuing fresh credit cards. The bank shall, however, continue to provide services to its existing customers, including its credit card customers,¡±

These actions are necessary because the Reserve Bank conducted IT examinations of the bank for 2022 and 2023 and found significant concerns. The bank failed to address these concerns properly and on time. There were serious problems in managing IT resources like inventory, updates, who can access systems, and keeping data safe.

The bank didn't meet the rules for managing risks and keeping information secure for two years in a row. Even after being told to fix things, the bank still didn't get it right in the following years. During later checks, the bank was found to be significantly non-compliant with the plans to fix these issues. The bank's efforts to meet compliance requirements were either insufficient, incorrect or not sustained.

Banking Service Disruptions

Kotak Mahindra Bank | Photo: BCCL

The Reserve Bank of India (RBI) mentioned that Kotak Mahindra Bank's Core Banking System (CBS) and its online and digital banking channels experienced multiple outages in the past two years. The most recent incident occurred on April 15, causing significant inconvenience to customers. During this outage, Kotak Bank customers were reportedly unable to access banking services for nearly 12 hours. The RBI highlighted how the lack of a strong IT infrastructure and risk management framework negatively impacted customers.

In the last two years, the Reserve Bank has been working closely with the bank to improve its IT systems, but the results have not been good. Recently, there has been a significant increase in the number of digital transactions made through the bank, especially credit card transactions. This has put extra pressure on the bank's IT systems.

"The Reserve Bank, therefore, has decided to place certain business restrictions on the bank as mentioned above, 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." the release added

The restrictions currently in place will be re-evaluated after a thorough external audit, which the bank will arrange with RBI's approval. The bank must address any issues identified in the audit or during RBI inspections to the satisfaction of the Reserve Bank. Additionally, these restrictions do not affect any other actions that the Reserve Bank may take against the bank under regulatory, supervisory, or enforcement measures.

Here are the key points why RBI barred Kotak Mahindra Bank

• The Reserve Bank of India (RBI) instructed Kotak Mahindra Bank to stop onboarding new customers online and on mobile and to cease issuing new credit cards.
• This regulatory action was due to concerns about the bank's compliance and risk management practices.
• However, RBI directed Kotak Mahindra Bank to continue providing services to its existing customers, including its credit card customers.
• The actions were taken because RBI had significant concerns about how Kotak Mahindra Bank managed its computer systems in 2022 and 2023.
• The bank didn't address these concerns properly and on time.
• Serious problems were found in managing IT resources, updates, user access, and data security.
• The bank didn't meet the rules for managing risks and keeping information secure.
• Even after being told to fix things, the bank still didn't get it right in the following years.
• The bank's computer systems had frequent problems in the past two years, like breaking down often, including a big issue on April 15, 2024, which caused trouble for customers.
• The bank didn't make its systems strong enough to keep up with its growth.
• The Reserve Bank put limits on what the bank can do to protect customers and prevent more problems.
• These limits will stay until the bank gets an outside check on its systems and fixes any problems to make the Reserve Bank happy again.

What is Kotak Mahindra Bank's response?

Kotak Mahindra Bank statement, ¡°We have received an order from the RBI which directs us to temporarily pause onboarding of new customers through our online and mobile banking channels and issuance of fresh credit cards. The Bank has taken measures for the adoption of new technologies to strengthen its IT systems and will continue to work with RBI to swiftly resolve balance issues at the earliest. We want to reassure our existing customers of uninterrupted services, including credit card, mobile and net banking. Our branches continue to welcome and onboard new customers, providing them with all the Bank¡¯s services, apart from issuance of new credit cards.¡±

Here are some RBI Banking Restrictions in Recent Years

Over the last five years, the main bank has imposed major restrictions on several banks and financial services companies like Paytm Payments Bank, Bank of Baroda, Bajaj Finance, HDFC Bank, Mahindra & Mahindra Financial Services, SBM Bank (India), Mastercard Asia/Pacific Pte, and American Express Banking Corp. and Diners Club International. These restrictions stop things like adding up new customers online or mobile banking, carrying out recovery or repossession and giving out loans for certain things. Some limits have been taken off by the RBI, but others are still there.

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Specific Cases

• On January 31, the bank stopped Paytm Payments Bank from taking any more money or giving out loans because they didn't follow the rules.
• On November 15, 2023, Bajaj Finance was told to stop giving out loans for certain things.
• On October 10, 2023, the Bank of Baroda was told to stop signing up new customers on its app because they weren't doing it properly.
• SBM Bank (India) was told on January 23, 2023, to stop sending money abroad until further notice.
• Mahindra & Mahindra Financial Services was told on September 22, 2022, to stop taking back things from people they lent money to.
• Paytm Payments Bank was told on March 11, 2022, to stop signing up new customers.
• On July 14, 2021, Mastercard Asia/Pacific was told to stop signing up new customers.
• On April 23, 2021, American Express Banking and Diners Club International were told to stop signing up new customers.
• On December 2, 2020, HDFC Bank was told to stop giving out new credit cards and stop doing some digital stuff for a while

Kotak Mahindra Bank's Share Price Plummets: Impact on Stakeholders

Today in the stock market, Kotak Mahindra Bank's shares, dropped by 10.85% to close at ?1,643 on the BSE. This happened because the Reserve Bank of India (RBI) stopped the bank from signing up new customers online and on mobile due to worries about its technology platforms.

This steep fall in Kotak Mahindra Bank's share price wiped out a large chunk of its overall value, making shareholders lose ?39,768.36 crore. The bank's market value, which was ?3,66,383.76 crore on Wednesday, dropped to ?3,26,615.40 crore by Thursday's end.

Uday Kotak, the bank's founder and a billionaire, owns 25.71% of Kotak Mahindra Bank. He lost around ?10,225 crore in just one day. Mutual funds, who own about 12.82% of the bank, likely lost over ?5,000 crore due to the share price fall.

Insurance companies, with an 8.69% stake, including Life Insurance Corporation of India with 6.46%, are also affected. They could lose around ?3,456 crore collectively, with LIC alone losing about ?2,569 crore because of the share price drop.

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(Disclaimer: This information is for educational purposes only and should not be construed as financial advice. Investing in stocks carries risks, and individuals should conduct their own research or seek professional guidance. The figures mentioned are based on available data and may change. We are not liable for any losses incurred from reliance on this information.)

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