RBI Bars Kotak Mahindra Bank From Issuing New Credit Cards, Adding Customers Online
Kotak Mahindra Bank had been found lacking in IT risk and information security governance for two consecutive years, RBI said.
The Reserve Bank of India on Wednesday directed Kotak Mahindra Bank Ltd. to cease and desist the issue of fresh credit cards and the onboarding of new customers through its online and mobile banking channels with immediate effect. The bank had been found lacking in IT risk and information security governance for two consecutive years.
The action against the third-largest private lender by market capitalisation was based on significant concerns found in RBI's IT examination for 2022 and 2023 and the continued failure on part of the bank to address these concerns in a comprehensive and timely manner, the central bank said in a statement.
RBI added that it will review its restrictions upon completion of a 'comprehensive external audit,' which will be commissioned by the Uday Kotak-founded bank with its prior approval.
"For two consecutive years, the bank was assessed to be deficient in its IT risk and information security governance, contrary to requirements under regulatory guidelines," the regulator's statement said.
The central bank noted that the bank's core bank system and its online channels suffered frequent outages in the past two years, the most recent being a service disruption on April 15, 2024, resulting in serious customer inconveniences.
"The bank is found to be materially deficient in building necessary operational resilience on account of its failure to build IT systems and controls commensurate with its growth," the RBI noted.
The central bank's action comes at a time when there has been a significant growth in the volume of the bank’s digital transactions, including transactions pertaining to credit cards, RBI explained in its release.
According to the lender's December quarter's investor presentation, the credit card portfolio rose 52% on a yearly basis to Rs 13,882 crore. Sequentially, it grew 10%.
The development comes in the light of RBI's recent actions to address non-compliance across regulated entities, such as imposing penalties and business restrictions.
In 2020, RBI took a comparable action against India's largest lender, HDFC Bank Ltd., by prohibiting it from issuing new credit cards and introducing digital products following payment failures. The restrictions on the bank were later lifted in 2021.
"The incremental growth of taking new customers digitally will be significantly affected, not the existing growth," Chakri Lokapriya, managing partner at RedStrawBerry LLP, told NDTV Profit in response to the curbs on Kotak Mahindra Bank. He added that the financial impact would be minimal.
Hercules Advisors' founder Aditya Shah too believed that there would be minimal impact on the lender's earnings. Shah, however, cautioned that the street would not take the news lightly from the stock perspective.
Shares of Kotak Mahindra Bank closed 1.7% higher at Rs 1,843.05 on Wednesday, compared with 0.2% gains in the country's benchmark S&P BSE Sensex.