Kotak Mahindra Bank shares plunged 10% on Thursday after the Reserve Bank of India (RBI) imposed restrictions on the bank on Wednesday, prohibiting the private sector lender from adding new customers through its online and mobile banking channels and from issuing new credit cards. However, the bank will continue to serve its existing customers, including those holding credit cards.

What Happened: The RBI detailed that these measures stem from concerns identified during its IT examination of the bank conducted in 2022 and 2023. The central bank found that Kotak Mahindra Bank had consistently failed to address these issues adequately and promptly.

“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,” stated the RBI.

The business restrictions aim to protect customers and prevent potential extended outages which could adversely affect the bank’s customer service efficiency and also the broader digital banking and payment systems ecosystem.

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The RBI highlighted that Kotak Mahindra Bank’s core banking system (CBS) and online digital channels have experienced frequent and significant outages over the last two years, with a notable service disruption on April 15, 2024, causing considerable customer inconvenience.

Despite ongoing engagement between the RBI and the bank to improve its IT resilience over the past two years, the outcomes have been unsatisfactory. The RBI also noted a recent surge in the bank's digital transaction volume, including credit card transactions, further straining its IT systems.

What are analysts saying: Citi analysts maintained a neutral call on the stock but asserted that the RBI’s action will negatively impact the lender’s growth, net interest margin (NIM), and fee income.

In the quarter that ended in December 2023, Kotak Mahindra Bank issued about 95% of new personal loans and 99% of new credit cards through digital channels. Additionally, customers opened 90% of new investment accounts and 76% of Fixed Deposit or Recurring Deposit accounts digitally. The bank’s credit card portfolio comprised 3.7% of its advances, according to Citi.

Jefferies stated that a resolution period exceeding six months for Kotak Mahindra Bank could potentially affect the lender’s revenues and costs. The brokerage has maintained a ‘Hold' call on Kotak Mahindra Bank shares.

Price Action: Kotak Mahindra Bank shares were down 10% at ₹1658.75 on Thursday shortly after the bourses opened for trade.

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