Kotak Bank plunged 10 per cent to Rs 1,620 after the Reserve Bank of India (RBI) barred the private lender from issuing new credit cards. The Reserve Bank of India (RBI) barred Kotak Mahindra Bank from adding new customers via its online portal and mobile app and from issuing new credit cards owing to significant shortcomings in its IT system, it said.
The move by the RBI has raised concerns among the existing customers of the bank regarding the safety of their funds in their accounts and the functionality of their credit cards.
If you are worried about what happens to your account in Kotak Mahindra and if you can avail the services of the bank, read on to know more.
What did the RBI order?
On Wednesday (24 April), the RBI barred Kotak Mahindra from onboarding new customers through its online and mobile banking channels and issuing fresh credit cards with immediate effect after it found “serious deficiencies” in the lender’s IT risk management.
The action was taken as per Section 35A of the Banking Regulation Act, 1949 which empowers the RBI 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”.
Why did the RBI take such action?
The regulator, RBI, issued the immediate “cease and desist” to Kotak Mahindra Bank owing to significant concerns arising out of the bank’s failure to address concerns in its IT management.
In a statement, the RBI said: “Serious deficiencies and non-compliances were observed in the 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, etc.”
It further explained that for two years — 2022 and 2023 — the bank was assessed to deficient in its IT Risk and Information Security Governance, contrary to requirements under regulatory guidelines.
“During the subsequent assessments, the bank was found to be significantly non-compliant with the Corrective Action Plans issued by the Reserve Bank for the years 2022 and 2023, as the compliances submitted by the bank were found to be either inadequate, incorrect or not sustained,” the RBI said.
Because of this, the bank’s online and digital channels have suffered frequent outages, the most recent being on 15 April, which resulted in serious customer inconveniences.
The RBI further stated that it was in high-level engagement with the bank for the last two years, stating its concerns, but the outcomes were far from satisfactory. It is 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, the Reserve Bank said.
“The RBI, 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 statement read.
What Did Kotak Mahindra Bank Say?
Kotak Mahindra Bank believes that these directions will not materially impact its overall business
“The Bank has taken concrete steps to adopt new technologies to strengthen its IT systems and will continue to work with RBI to swiftly resolve balance issues at the earliest. The Bank would like to reassure its existing customers of uninterrupted services, including credit card, mobile and net banking,” Kotak Mahindra Bank said in a stock exchange filing.
The bank’s branches will continue to onboard new customers, providing them with all the bank’s services, except issuance of new credit cards, it added.
Analysts’ Take
Analysts believe the RBI restrictions would adversely impact Kotak Mahindra Bank’s growth. They expect the restrictions will be reviewed upon completion of external audit and corrective action plan to RBI’s satisfaction which typically takes 6-12 months.
“We believe such restrictions should impact business growth, including Kotak Mahindra Bank’s already dwindling CASA ratio (down 13% from its peak to ~48%) and its new card acquisition; this will lead to earnings being hit in the medium term. Additionally, the regulatory overhang would delay any hope of a re-rating post the recent Management change,” said Anand Dama, Senior Research Analyst at Emkay Global Financial Services.
The brokerage revised its rating on the stock to ‘Reduce’ from ‘Add’, and cut Kotak Mahindra Bank share price target to ₹1,750 per share from ₹1,950 earlier.
Citi analysts believe that the RBI action would adversely affect the lender’s growth, net interest margin (NIM) and fee income.
In the quarter ended December 2023, Kotak Mahindra Bank disbursed around 95% of new personal loans and 99% of new credit cards digitally. Moreover, 90% of new investment and 76% of Fixed Deposit or Recurring Deposit Accounts were opened digitally. The credit card portfolio of the bank constituted 3.7% of advances, Citi noted.
Jefferies said that if the resolution for Kotak Mahindra Bank takes more than six months, it could potentially impact revenues and costs for the lender. The brokerage maintained a ‘Hold’ call on Kotak Mahindra Bank shares.
At 9:20 am, Kotak Mahindra Bank shares were down 10 per cent at Rs 1,658.75 apiece on the BSE.
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