RBI bars Kotak Bank from adding new customers; Your money in the bank is safe

  • The RBI has barred the private sector lender from new issuances due to deficiencies in the bank's IT system in 2022 and 2023, according to the latest statement.

Nikita Prasad
Updated25 Apr 2024
(File Picture) Kotak Mahindra Bank branch in Mumbai. Photo by Aniruddha Chowdhury/Mint
(File Picture) Kotak Mahindra Bank branch in Mumbai. Photo by Aniruddha Chowdhury/Mint

Kotak Mahindra Bank has been directed by the Reserve Bank of India (RBI) to cease onboarding new customers through its online and mobile banking channels and issuing fresh credit cards from immediate effect. The central bank has barred the private sector lender from new issuances due to deficiencies in the bank's IT system in 2022 and 2023. 

However, the RBI restriction order raises doubts for the existing customers of the bank over the safety of money in their respective accounts and credit card functionalities. Even though Kotak Mahindra Bank cannot onboard new customers or issue fresh credit cards, but the bank's existing customers having accounts and other financial assets, need not worry over RBI's latest order.

Will Kotak's existing customers face issues?

Explaining the restrictions imposed on Kotak Mahindra Bank, the RBI has also said in its statement on Wednesday, ‘’The bank shall, however, continue to provide services to its existing customers, including its credit card customers.''

Also Read: RBI bars Kotak Mahindra Bank from adding new customers via web, mobile app

The existing customers of the bank can continue to use their credit cards and make account transactions online and offline without any restrictions. The RBI added that it was placing the restrictions on Kotak in the interest of customers and to avoid a possible prolonged outage that might affect customer service and broader digital banking and payment systems.

RBI order against Kotak: What led to the crackdown?

RBI said it found “serious deficiencies and non-compliances" in 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.

In the absence of a robust IT infrastructure and IT Risk Management framework, the RBI said the bank's Core Banking System (CBS) and its online and digital banking channels have suffered frequent and significant outages in the last two years, the recent one being a service disruption on April 15, 2024, resulting in serious customer inconveniences.

"The bank is found to be materially deficient in building necessary operational resilience on account of its failure to build IT systems and controls commensurate with its growth," said the central bank.

The RBI said in its statement that for two consecutive years, Kotak Mahindra Bank was assessed to be deficient in its IT Risk and Information Security Governance, contrary to requirements under regulatory guidelines.

Also Read: How a recent RBI proposal on KYC has got payment aggregators on the backfoot

How will RBI's order impact Kotak?

Industry experts say that the central bank's restrictions imposed on Kotak will impact the bank's customer acquisition targets, which may in turn affect its growth in the short run. It may also hurt the bank's target of loan share.

"The RBI's action is obviously going to impact the bank's ambition to get to a 15 per cent share of unsecured loans but the bigger impact is going to be on the savings accounts," said Pranav Gundlapalle, senior research analyst at AllianceBernstein told news agency Reuters.

Market experts noted that the requisite standards as stipulated by RBI on IT front were found to be an issue as regards compliance entailing this action. Normally adequate chances are provided to banks to rectify the shortcomings found in the course of audit and inspection and stringent action is taken only after following the prescribed procedure. 

Also Read: Why has Kotak Mahindra Bank stock’s valuation de-rated?

‘’The bank can take the desired remedial steps on the basis of the findings of proposed external audit prescribed by RBI where after the position may be reviewed. This is indicative of the fundamental general underlying need to have robust systems and procedures and the timely upgradation of the same in proportion to the increase in volume and complexity of business transactions,'' Jyoti Prakash Gadia, Managing Director at Resurgent India told LiveMint.

When will RBI lift curbs on Kotak?

The restrictions imposed will be reviewed upon completion of a comprehensive external audit to be commissioned by the private bank with the prior approval of RBI. The curbs will be lifted once remediation of all deficiencies that may be pointed out in the external audit as well as the observations contained in the RBI inspections are fulfilled, ‘to the satisfaction of the RBI’

Kotak Mahindra Bank Limited is scheduled to announce the consolidated and standalone audited financial results for the quarter and financial year ended March 31, 2024, on Saturday (May 4). On Wednesday, shares of Kotak Mahindra Bank settled 1.64 per cent higher at 1,843.05 apiece on the BSE.

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