RBI action poses challenge to Jay Kotak-led Kotak 811, say industry veterans

Also read: Should Kotak Mahindra Bank’s existing customers worry about the RBI action ?

Rajnish Kumar, former chairman, SBI, said he sees some short-term impact on business but no major long-term impact. "With competition getting stronger in this field, regulatory actions like these can affect business for some time. A few years back, HDFC Bank faced a similar regulatory move. But no major business impact is expected," said Kumar.

The RBI action will impact the lender’s co-branded card deals, and the bank’s growth prospects in the short term, they said.

“The decision will impact the bank's overall business as well. Kotak Bank can't sell their top-selling Kotak Myntra card after this action,” said Sumantha Mandal, Founder, TechnoFino and CreditPedia.

Sharat Chandra, Founder, EmpowerEdge Ventures, said: "The decision would not only impact the bank's growth prospects in the short term but also reflect on its ability to protect customer data and follow regulations."

The RBI whip

On April 24, the RBI barred the bank from onboarding new customers through its online as well as mobile banking channels. The central bank also restricted the bank from issuing fresh credit cards.

Industry veterans had said that the regulatory action might affect Kotak 811. Jay has been co-heading it since early 2021. There has been speculation about the younger Kotak’s future role, including whether one day he would step into his father’s shoes.

In October 2023, Uday Kotak, at an event in Mumbai, had said that Jay’s future would solely depend on merit. “It is for the bank and the board to decide about the future of my son,” the billionaire banker said.

Launched on November 8, 2017, Kotak 811 was envisaged as a digital bank within the bank. Apart from Jay Kotak, the senior management of Kotak811 includes Manish Agarwal, Business Head, and Shanti Ekambaram, Whole-Time Director and Group President, Consumer Banking.

Kotak811’s financials

As per the latest data, Kotak 811 is a critical part of the lender’s digital business, accounting for nearly 95 percent of personal loans disbursal, 99 percent of credit card sales and 79 percent of new business.

In financial year 2022-23, Kotak811 had over 1.7 crore customers across India. The bank’s annual report for FY23 showed that while the customer base grew by approximately 42 percent year on year (YoY), cross-selling grew by approximately 72 percent.

“Similarly, while the book value increased by 32 percent, overall throughput increased by 81 percent YoY. In FY 2022-23, 72 percent of the new savings accounts were acquired by Kotak811 and over 50 percent of the credit cards, unsecured loans, trading accounts and recurring deposits were cross-sold to Kotak811 customers,” the annual report said.

Also read: Kotak Mahindra Bank ups digital game; plans to launch revamped Kotak 811 and new payments service app

RBI’s observations

The RBI, in its examination of the bank's IT systems over the last two years, said that the bank continuously failed to address concerns raised by the regulator.

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

According to the central bank, serious deficiencies and non-compliance were observed in the areas of IT inventory, patch and change, user access and vendor risk management. There were also gaps in data security and data leak prevention strategy, business continuity and disaster recovery rigour and drill.