Why has RBI stopped Kotak Mahindra Bank from taking on new customers online? (2024)

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The Reserve Bank of India has dropped the hammer on Kotak Mahindra Bank (KMB).

The central bank has halted KMB from onboarding new customers through online and mobile portals as well as ordered it to stop issuing fresh credit cards.

The RBI in a statement said it took action under Section 35A of the Banking Regulation Act, 1949, as “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.”

But what happened exactly? And what does this mean for the bank?

Let’s take a closer look:

So what happened?

In short, Kotak Mahindra Bank basically cannot take on new customers.

It cannot issue new credit cards either.

The RBI said this development came based on ‘significant concerns’ after it examined the bank’s IT in 2022 and 2023.

It also cited the bank’s ‘continued failure’ to adequately address these issues.

The bank was deemed to have fallen short of the regulatory guidelines spelled out in the IT Risk and Information Security Governance for 2022 and 2023.

“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,” it said in a statement.

“In the absence of a robust IT infrastructure and IT Risk Management framework, 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 15 April, 2024, resulting in serious customer inconveniences,” the RBI was quoted as saying by Moneycontrol.

“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,” it added.

“The Reserve Bank, therefore, has decided to place certain business restrictions on the bank, 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,” it further stated.

It said the restrictions would be re-examined after a comprehensive external audit commissioned by the bank with the prior approval of RBI, and remediation of all deficiencies that may be pointed out in the external audit as well as the observations contained in the RBI Inspections, to the satisfaction of the Reserve Bank.

It added that these restrictions are without prejudice to any other regulatory, supervisory or enforcement action that may be initiated against the bank by the Reserve Bank.

What does this mean for the bank?

It is important to note that the bank, however, can continue to service its existing customers, including its credit card users.

However, Moneycontrol reported that this is a blow to the bank as it gets most of its new customers from its mobile and online portals.

The website also cited experts as saying this could adversely affect the bank’s co-branded credit card deals.

News18 quoted Jyoti Prakash Gadia, managing director at Resurgent India, as saying, “The RBI’s restrictions on Kotak Mahindra Bank in respect of fresh onboarding of new customers through online mode and mobile banking and issuing credit cards is indicative of the significant importance that the RBI is laying on the need to have strong and sustainable information technology (IT) systems in the context of the current growth of digital banking.”

This isn’t the first time the RBI has cracked down on the bank.

The RBI in July 2022 imposed a monetary penalty of Rupees 1 crore and five lakh on KMB.

That move came due to non-compliance with the Banking Regulation Act, 1949 and directions on ‘Customer Protection – Limiting Liability of Customers in Unauthorised Electronic Banking Transactions’, and ‘Loans and Advances – Statutory and Other Restrictions’.

The Central bank in December 2020 had also barred HDFC Bank from issuing new cards and launching new digital initiatives after repeated instances of technological outages at the lender, which is the market leader in the credit cards segment.

The RBI action came after the bank’s customers faced a number of incidents of outages in Internet banking, mobile banking, and payment utilities over the past two years. Rivals ICICI Bank and SBI Cards seized the opportunity to narrow the gap with HDFC Bank.

The action against HDFC Bank was followed by a ban on new card issuances by Mastercard and American Express due to their failure to adhere to data localisation rules.

The RBI eventually partially lifted the ban on card issuances in August 2021.

It lifted all restrictions on HDFC bank in March 2022.

With inputs from agencies

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