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

shares of Kotak Mahindra Bank plummeted 10 percent on April 25, a day after the regulatory action.

Should the customers of Kotak Mahindra Bank worry after the Reserve Bank of India (RBI), on April 24, barred the bank from onboarding new customers through its online and mobile banking channels and issuing fresh credit cards?

The RBI cited serious deficiencies and non-compliance on the IT and risk management fronts.

How will this impact the digital banking and credit card customers of the bank? Here is an explainer.

Also read: RBI action may hit Kotak Mahindra Bank as majority of business sourced digitally: Brokerages

Impact on customers

The RBI said that Kotak Mahindra Bank cannot onboard new customers through its online and mobile banking channels and issue fresh credit cards. The regulator said that the ban will not impact existing customers and Kotak can continue to provide services to them, including its credit card customers.

In a relief to existing customers, the bank said in a statement: “ We want to reassure our existing customers of uninterrupted services, including credit card, mobile and net banking customers. Our branches continue to welcome and onboard new customers, providing them with all the services, apart from new credit cards.”

What triggered the RBI action?

The RBI action 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.

Also read: RBI action: Kotak Mahindra Bank says taken measures to adopt new tech, assures existing customers

"These actions are necessitated based on 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 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.

What did the RBI examination find out?

During subsequent assessments, Kotak Mahindra was found to be significantly non-compliant with the corrective action plans issued by the RBI for 2022 and 2023, as the compliances submitted by the bank were found to be either inadequate, incorrect or not sustained, the central bank said.

"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 April 15, 2024, leading to serious customer inconveniences," the RBI said.

During the investigations, the RBI found that the bank is materially deficient in building necessary operational resilience on account of its failure to build IT systems and controls commensurate with its growth.

Impact on Kotak811

Kotak811 is the digital banking arm of the bank and is a major onboarding platform of new customers, digitally.

Brokerage Macquarie said a good proportion of assets and liability products are sourced digitally.

"A lot of savings accounts are opened through 811 digital channel. On the asset side, a majority of sourcing of unsecured products (9.2 percent mix ex-MFI) is done digitally. These segments have grown at 40 percent YoY (9M FY24) vs overall growth of 18 percent YoY," Suresh Ganapathy of Macquarie said in a note.

In a report, Citi said that in the third quarter of FY24, 95 percent of the new personal loans and 99 percent of new credit cards were sourced digitally. In the same way, 90 percent of new investments and 76 percent of fixed deposits and recurring deposits were sourced digitally.

Further, the bank's credit card portfolio constituted 3.7 percent of its total advances in the third quarter, the brokerage said, adding that this portfolio grew 52 percent on a year-on-year basis. According to Citi, the RBI action will adversely impact growth, fee income and net interest margin (NIM). Further, the RBI action would mean that the pace of branch expansion needs to be accelerated, the brokerage said.

Shares of Kotak Mahindra Bank plummeted 10 percent on April 25, a day after the regulatory action. The central bank’s action may hamper Kotak’s retail business and sentiment around the stock price, according to analysts.