Action on Kotak Mahindra Bank signals RBI's intent to address systemic gaps in banking, say experts

The Reserve Bank of India barred the bank from onboarding new customers through its online and mobile banking channels and issuing fresh credit cards.

The business restrictions imposed by the Reserve Bank of India (RBI) on Kotak Mahindra Bank for non-compliance in the areas of IT inventory management signals the central bank's eagerness to stem any systemic risks in the banking sector, experts said.

They further added that the move is likely to make other lenders in the industry more cautious about their compliance with the regulations.

“The intent behind the regulator's action is very clear - they do not want any systemic risk emanating from gaps that they have identified and highlighted to the banks,” said Karan Gupta, Director & Head - Financial Institutions, India Ratings & Research.

Adding to this, Shreyansh Shah, Research Analyst, StoxBox said the actions are much beyond an entity-level action and is to prevent systemic risks in the overall banking sector.

Also read: RBI clampdown on Kotak Mahindra Bank: Timeline of recent regulatory actions on large lenders

Restrictions

On April 24, the Reserve Bank of India (RBI) imposed business restrictions on Kotak Mahindra Bank (KMB) barring the lender from adding new customers through digital channels and issuing new credit cards.

The actions followed an RBI examination of the bank's IT systems over the last two years and the bank’s “continued failure” to address concerns, the central bank said.

The ban will not impact existing customers and Kotak can continue to provide services to them, including its credit card customers, the RBI said.

The central bank's move has resulted in the lender witnessing its biggest intra-day decline since March 23, 2020, leading to an erosion of Rs 35,000 crore in market cap.

"These actions are necessitated based on significant concerns arising out of Reserve Bank’s IT Examination of the bank for the years 2022 and 2023 and the continued failure on the part of the bank to address these concerns in a comprehensive and timely manner," RBI said.

According to the central bank, serious deficiencies and non-compliance 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, and so on.

“This action gives the message to the industry to comply with all the regulations and that the banks system should be robust enough. I don’t think any banks have that thought process to not follow the regulations, in many cases it may become interpretation, and RBI keeps clarifying,” said Sanjay Agarwal, Senior Director, CareEdge Ratings.

Also read: The questions raised by RBI's restrictions on Kotak Mahindra Bank

Impact on business

Analysts feel that the business restrictions on Kotak Mahindra Bank is likely to impact their business growth and lead to a hit in earnings in the medium term.

Emkay Global Financial Services in its report said that restrictions on Kotak Mahindra Bank would impact business growth, including the bank’s already dwindling CASA ratio (down 13 percent from its peak to ~48 percent).

Further, the report added that it will also impact new card acquisition (CIF growth at 21 percent on-year/spends at 34 percent on-year).

‘Additionally, the regulatory overhang would delay any hope of a re-rating post the recent management change,” report added.