Banking Central | Big banks brush aside tech alerts until RBI cracks the whip

Transactions through the unified payments interface (UPI) platform crossed 100 billion in 2023 alone to close at 118 billion

The RBI crackdown on Kotak Mahindra Bank last week didn't come as a bolt from the blue. The action didn't really surprise the insiders too.

The regulator had conducted IT checks on the bank in 2022 and again in 2023 before issuing corrective action plans. Going by the statement issued by the Reserve Bank of India (RBI), the continued failure on part of the private sector lender to address the concerns raised by the watchdog in a comprehensive and timely manner had resulted in the action last week.

Put it simply, the central bank waited for two years before cracking the whip, because the bank failed to comply with the guidelines. For the new chief executive of Kotak Mahindra Bank, the RBI action has come as the first big challenge since he took over following the exit of bank's founder Uday Kotak from an executive role.

Even in the case of HDFC Bank back in December 2020, the RBI action had barely triggered frowns. There were frequent engagements between the

regulator and the bank in the one-and-a-half years preceding the RBI action when the lender had reported frequent digital outages causing inconvenience to customers. This too was a major challenge for then a new-comer, Sashidhar Jagdishan, who had just taken the baton from Aditya Puri. In HDFC Bank, too, the issue was inaction or inadequate action by the private lender during the Puri days in addressing its perpetual tech issues.

Yet another case—though not directly comparable with KMB and HDFC Bank—is the RBI action on Paytm Payments Bank Ltd (PPBL) early this year. Among the problems cited by the RBI, one of the issues was inadequate compliance in the way the bank carried out the functions of the Paytm App and drawing a line between the parent and the bank in terms of operations.

PPBL’s dependence on the IT infrastructure of OCL remained absolute and there was no operational segregation. Many transactions were routed through the parent entity-owned apps, raising serious concerns on data privacy and data sharing, the RBI found during its inspections. In Paytm case, too, the RBI had been talking to PPBL for two-and-a-half years about the non-compliance but the company didn't take any action.

In all three cases of RBI crackdown on Kotak Mahindra Bank, HDFC Bank and Paytm Payments Bank, one factor stands common - the regulator gave sufficient time each of the entities to rectify the tech-related issues, but all of them had shrugged off the warnings.

But why are the banks failing to get their tech game right, again and again?

The fact is while the banks went on an overdrive to launch digital products, they did not invest enough to firm up and upgrade their technology platforms. The RBI has taken the lapses seriously. Technology has helped banking services evolve to the tech-age, but for the banking services to become more inclusive, the lenders need to make sure the alternative channels work seamlessly. Considering the significant growth in number and value of digital transactions over the last few years, they need to invest in technology.

The advancement in technology, the rise in digital payment apps, and the ease of digital banking have sent online transactions zooming across the country. Just to understand it better, transactions through the unified payments interface (UPI) platform crossed 100 billion in 2023 alone to close at 118 billion, shows data shared by the National Payments Corporation of India (NPCI). This marks a 60 percent growth from 74 billion UPI transactions recorded a year back.

Also, most banks have significantly shifted their business acquisitions through digital channels. In case of Kotak Bank, as per latest data, Kotak 811 has emerged as a a critical division in its operations, accounting for nearly 95 percent personal loan disbursals, 99 percent credit card sales, and 79 percent new businesses.

But, while the banks relied increasingly on digital channels, they did not upgrade their systems to handle such spiralling business volumes, which inexorably paved way for a spurt in glitches. The banks downplayed the technical glitches as routine occurrences, but the RBI refused to buy the argument. The regulator kept on reiterating that the banks need to scale up investment in strengthening the technology before launching products to ensure their platforms could handle the volume without causing inconvenience to the customer.

For some reason, the banks seem to have ignored the wake-up call from the RBI for long. Now, after the whip if cracked, it’s high time for the banks to go for a course correction.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.