On April 24, Wednesday, The Reserve Bank of India (RBI) directed Kotak Mahindra Bank to suspend onboarding new clients through online and mobile banking channels, as well as providing new credit cards, with immediate effect. As of March 31, Kotak Mahindra Bank has issued 59.54 lakh credit cards. Here’s what the RBI said and why it took these steps.
What precisely did the RBI say about Kotak?
The banking regulator ordered Kotak Mahindra Bank to cease and desist, with immediate effect, from onboarding new customers through its online and mobile banking channels and issuing new credit cards. This was done under Section 35A of the Banking Regulation Act of 1949, which gives the RBI the authority to direct 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.
These actions were taken after RBI’s information technology (IT) examination of the private sector lender for the years 2022 and 2023 threw up significant concerns — which the Kotak Mahindra Bank failed to address.
Did the RBI confer with the bank before taking action?
Over the last two years, the regulator has maintained ongoing high-level interaction with the bank on all of these issues. The RBI also noted that the number of the bank’s digital transactions, particularly credit card transactions, has recently increased significantly, putting additional strain on the IT infrastructure.
The Reserve Bank stated that it has decided to impose certain business restrictions on the bank in the interest of customers and to avoid any potential prolonged outage, which could seriously impact the bank’s ability to provide efficient customer service, as well as the financial ecosystem of digital banking and payment systems.
What about the existing customers?
The RBI stated that Kotak Mahindra Bank will continue to offer services to its current clients, including credit card holders.
Kotak’s response
In a statement, Kotak Mahindra Bank clarified its branches will continue to onboard new customers, and provide them with all of the bank’s services, apart from issuance of new credit cards.
The bank said, It has taken measures for adoption of new technologies to strengthen its IT systems and will continue to work with RBI to swiftly resolve balance issues at the earliest. They reassured their existing customers of uninterrupted services, including credit card, mobile and net banking.
Following the RBI’s action, The stock price of Kotak Mahindra Bank dropped up to 12% to Rs 1,620.
