Shares of Kotak Mahindra Bank Drop 12% Following RBI’s Prohibition on Digital Customer Onboarding

Following the Reserve Bank of India’s (RBI) decision to prohibit the private lender from issuing any further credit cards, Kotak Bank saw a 10% decline to Rs 1,620. Due to serious issues with its IT system, Kotak Mahindra Bank was prohibited by the Reserve Bank of India (RBI) from accepting new clients via its mobile app and web site, as well as from issuing new credit cards.

Existing bank clients are now worried about the safety of their money in their accounts and the operation of their credit cards as a result of the RBI’s action.

Continue reading to learn more if you’re concerned about what will happen to your Kotak Mahindra account and if you can use the bank’s services.

What was the RBI’s order?

The RBI discovered “serious deficiencies” in Kotak Mahindra’s IT risk management on Wednesday, April 24, and as a result, the lender was prohibited from onboarding new clients via its online and mobile banking channels and from issuing new credit cards with immediate effect.

The RBI has the authority to order banks “to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company,” as stated in Section 35A of the Banking Regulation Act, 1949, which is why the action was taken.

Why did the RBI behave in this way?

The Reserve Bank of India (RBI) issued an urgent “cease and desist” order to Kotak Mahindra Bank due to serious concerns about the bank’s handling of IT issues.

The RBI said in a statement that “serious deficiencies and non-compliances were observed in the areas of vendor risk management, business continuity and disaster recovery drills, patch and change management, user access management, data security and data leak prevention strategy, etc.”

It went on to say that, in violation of regulatory criteria, the bank was found to have inadequate information security governance and IT risk management for the years 2022 and 2023.

“The bank’s compliances were found to be either inadequate, incorrect, or not sustained during the subsequent assessments, which revealed the bank to be significantly non-compliant with the Corrective Action Plans issued by the Reserve Bank for the years 2022 and 2023,” the RBI said.

As a consequence, there have been many outages on the bank’s online and digital platforms; the most recent one occurred on April 15 and caused significant problems for customers.

The RBI said that while it had been communicating its concerns to the bank at a high level for the previous two years, the results had been far from adequate. The Reserve Bank said that there has also been a noticeable increase in the amount of digital transactions made by the bank recently, notably credit card-related transactions, which is placing further strain on the IT infrastructure.

“Therefore, 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, the RBI has decided to place certain business restrictions on the bank as mentioned above,” the statement stated.

What Was Said by Kotak Mahindra Bank?

According to Kotak Mahindra Bank, these changes won’t have a significant effect on its overall company.

“The Bank will keep collaborating with RBI to expeditiously address balance concerns as soon as possible. The Bank has made significant measures to implement new technology to bolster its IT systems. In a stock market statement, Kotak Mahindra Bank said, “The Bank would like to reassure its existing customers of uninterrupted services, including credit card, mobile, and net banking.”

With the exception of issuing new credit cards, the bank’s branches will continue to accept new clients and provide them all of its services, the statement said.

Experts’ Views

According to analysts, Kotak Mahindra Bank’s growth will be negatively impacted by the RBI regulations. They anticipate that the limits will be revisited when the remedial action plan and external audit are completed to RBI’s satisfaction, which usually takes six to twelve months.

The expansion of businesses, notably Kotak Mahindra Bank’s already declining CASA ratio (down 13% from its peak to about 48%) and its recent card acquisition, should be impacted by these limits, in our opinion. In the medium run, this would negatively affect profitability. Furthermore, Anand Dama, Senior Research Analyst at Emkay Global Financial Services, said that any expectation of a re-rating after the recent management transition will be delayed by the regulatory overhang.

The brokerage lowered its price objective for Kotak Mahindra Bank shares to ₹1,750 per share from ₹1,950 previously and changed its recommendation on the company from ₹Add to ₹Reduce.

According to Citi analysts, the RBI’s move would have a negative impact on the lender’s growth, fee revenue, and net interest margin (NIM).

Kotak Mahindra Bank distributed over 95% of new credit cards and 99% of new personal loans online in the quarter that concluded in December 2023. Furthermore, 76% of accounts for fixed deposits or recurring deposits and 90% of new investments were formed online. According to Citi, the bank’s credit card portfolio accounted for 3.7% of advances.

Jefferies said that the lender’s earnings and expenses would be impacted if the Kotak Mahindra Bank resolution takes longer than six months. The firm kept its recommendation on Kotak Mahindra Bank shares at “Hold.”

Kotak Mahindra Bank shares were down 10% at Rs 1,658.75 a share on the BSE at 9:20 a.m.