Following the Reserve Bank of India’s (RBI) decision on April 24 to prohibit Kotak Mahindra Bank from adding new customers through its online and mobile banking channels and from issuing new credit cards due to IT and risk management shortcomings, there are concerns about the impact on the bank’s digital banking and credit card customers.

In this article, we will break down the reasons behind the ban and how it is likely to impact customers of the lender.

Impact on Customers

The RBI’s directive only affects the bank’s ability to onboard new customers digitally. Existing customers can continue to avail themselves of services, including credit cards, mobile and net banking, without interruption.

Kotak Mahindra Bank reassured its existing customer base with a statement emphasising uninterrupted service: “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."

"The bank shall, however, continue to provide services to its existing customers, including its credit card customers," the RBI also said in a statement.

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Reason Behind RBI Action

The RBI took these actions because of ongoing issues found during the central bank’s IT examination of the bank in 2022 and 2023. Despite these concerns, the bank didn’t fix them quickly enough or completely, according to the RBI.

These areas included IT inventory and change management, user access, vendor risk management, data security, business continuity and disaster recovery.

The bank’s submissions to address these issues were either insufficient, incorrect or not sustained. The RBI pointed out frequent and significant outages, including a disruption on April 15, 2024, causing considerable inconvenience to customers.

The RBI concluded that the bank’s IT infrastructure and risk management framework were inadequate for its growth, impacting its Core Banking System (CBS) and digital banking channels.

The RBI mentioned that for two years in a row, the bank didn’t meet the required standards for IT Risk and information security governance.

These measures aim to protect customers and prevent long service outages. Such outages could harm the bank’s customer service and the wider digital banking and payment systems.

Impact on Kotak811

Kotak811, the bank’s digital banking segment, serves as a primary platform for customer onboarding. Brokerage Macquarie highlighted that a substantial portion of the bank’s assets and liabilities are sourced digitally.

Macquarie noted that a significant proportion of savings accounts and unsecured products are also sourced digitally, with growth rates outpacing the overall growth.

Citi’s report indicated that a high percentage of new personal loans, credit cards, investments and deposits were sourced digitally in the third quarter of FY24.

Kotak Mahindra Bank’s credit card portfolio accounted for 3.7% of its total advances in Q3, growing by 52% year on year.

Citi analysts anticipate that the RBI’s action will negatively impact growth, fee income and net interest margin (NIM). They also suggest that the bank may need to expedite branch expansion to compensate for the digital onboarding restriction.

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