RBI’s Clamp Down On Kotak Bank: Online Boarding of customers under radar

Regulatory noose: Is it a crackdown or a clean-up? Well, Reserve Bank of India in its latest tightening of regulatory noose acted on Kotak Mahindra Bank, fifth most valuable private lender in nation. central bank directed Kotak Mahindra Bank to halt onboarding new customers online and through mobile banking platforms immediately. This directive comes in light of data security concerns and deficiencies in bank's IT infrastructure for years 2022 and 2023, as highlighted by RBI.

Why Action?

RBI pointed out serious deficiencies and non-compliances in various aspects of IT management, including inventory management, patch and change management, user access management, vendor risk management, and data security measures.

Despite being given specific plans to dress se issues, Kotak Mahindra Bank failed to rectify m, leing to continued concerns regarding its IT resilience.
RBI also noted that bank experienced several major outages in its core banking system and online services over past two years, attributed to inequate IT infrastructure and risk management. se issues culminated in a significant service disruption on April 15, affecting bank's customers.

Given exponential growth in digital transactions, particularly credit cards, RBI imposed business restrictions on Kotak Mahindra Bank to safeguard customer interests and prevent prolonged outages that could disrupt financial ecosystem.

However, existing customers, including credit cardholders, will not be affected, as bank will continue to provide uninterrupted services to its current customer base.

In response, Kotak Mahindra Bank assured its existing customers of seamless access to banking services, including credit card, mobile, and net banking. bank emphasised its commitment to opting new technologies to strengn its IT systems and pledged to work closely with RBI to dress identified issues promptly.

Stock Rout

As a consequence of RBI crackdown on Kotak Mahindra Bank, shares plunged by as much as 10 per cent. On or hand, Axis Bank shares surged 4 per cent after it reported better-than-expected earnings.

Axis Bank surged past Kotak Mahindra Bank on Thursday to claim title of India's third most-valued private lender. reversal came as Kotak Bank's shares plummeted following RBI’s decision to impose restrictions on bank's digital customer onboarding and credit card issuance.

Kotak Bank's stock opened sharply lower on Thursday in response to RBI's move, closing a staggering 11 per cent down at Rs 1,643 per share on Bombay Stock Exchange (BSE). This downturn translated into a significant loss for shareholders, amounting to nearly Rs 40,000 crore as bank's market capitalization dwindled to Rs 3.3 lakh crore.

With a market capitalisation of Rs 3.5 lakh crore, Axis Bank seized opportunity to claim fourth position among India's most valued lenders. top three positions remain occupied by HDFC Bank (Rs 11.5 lakh crore), ICICI Bank (Rs 7.8 lakh crore), and state-owned SBI (Rs 7.3 lakh crore).

downturn in Kotak Bank's fortunes also h personal ramifications for its founder, Uday Kotak, whose wealth saw an erosion of $1.2 billion. Kotak, who holds a 25.71 per cent stake in bank, witnessed a decline in his holding's value by approximately Rs 10,300 crore.

Not first and last

This isn't first instance of RBI taking regulatory action against financial institutions. In past five years, RBI has come down heavily on many banks, fintechs, and apps.

RBI imposed business restrictions on Paytm Payments Bank on January 31, 2023, due to repeated violations of norms and non-compliance with rules. bank was barred from accepting fresh deposits and conducting credit transactions after February 29.

In October 2023, apex bank directed Bank of Baroda to suspend onboarding customers onto ‘BoB World’ mobile application due to material supervisory concerns.

Similarly, RBI crackdown on HDFC Bank's internet outages: In December 2020, RBI instructed HDFC Bank to halt all launches of its forthcoming digital business-generating activities and sourcing of new credit card customers following recurring outages at its data centre.