Restrictions on KMB
The Reserve Bank of India (RBI) on April 24 barred Kotak Mahindra Bank (KMB) from onboarding new customers on its online and mobile banking channels, and issuing fresh credit cards.
It would however be allowed to provide these services to its existing customers.
RBI observed “serious deficiencies and non-compliances” concerning KMB’s IT inventory and user access management, data leak and leak prevention strategy, business continuity and disaster recovery rigour and drill, among other things.
This was based on the regulator’s examination of the private bank’s systems for two years, that is, 2022 and 2023.
The regulator said KMB continually failed to address concerns in a “comprehensive and timely manner”.
The bank was also deemed non-compliant with RBI’s subsequent recommendations or ‘Corrective Action Plans’ (CAPs).
CAPs are part of an intervention scheme of the RBI to ensure robustness of regulated entities.
As per the RBI, the compliances submitted by KMB were either “inadequate, incorrect or not substantiated”.
Further, in the absence of robust IT infrastructure and risk management systems, its online and digital banking channels have suffered “frequent and significant outages in the last two years”
Similar actions in the past
The RBI, like its peers world over, has been particularly wary of how digital banking and the overall financial landscape functions.
In December 2020, the regulator had ceased HDFC from launching any new digital products and sourcing new credit card consumers.
This was also based on a two-year assessment that had come across recurrent incidents of outage in its internet and mobile banking platforms, alongside payment utilities.
The restrictions were lifted more than a year later in March 2022 after a successful remediation.
On similar lines, the RBI in October 2023 directed the Bank of Baroda to suspend any fresh onboarding of customers onto its ‘bob World’ mobile application.
This was also based on “certain material supervisory concerns” with the RBI demanding the rectification of observed deficiencies.
Global agencies’ view
According to S&P Global Ratings, the regulatory action may set back the bank’s credit growth and profitability.
It added that credit cards are among the higher-yielding target growth segment of the bank
The portfolio grew 52% YoY as on December 31 last year compared with a total loan growth of 19%.
Action by the RBI, this week could push the bank to rely more on physical branch network expansion to supplement growth thus entailing higher operating costs
However, the agency maintained that RBI’s action will not “materially affect” its ratings
This is because credit cards accounted for only 4% of the bank’s total loans at the end of the year and it would still be able to cross-sell its products.
Response of KMB CEO
The banks’ net profit in the fourth quarter rose 18% to ₹4,133 crore from ₹3,496 crore in the year-ago period.
This was on the back of a 13% YoY growth in net interest income at ₹6,909 crore.
Importantly however, the CEO Mr. Vaswani stated that while the financial impact (from the RBI action) is expected to be minimal, he was more worried about the “reputational impact”.
Earlier, Mr. Vaswani had listed previous efforts taken by the bank to up their tech resilience, including capacity building and addressing risk and resilience.
Importantly, he stated that technology expenses accounted for about 10% of their total operating expense.
Kotak Mahindra however had plans to continue investing in their card franchise. The plan may now be put on hold
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