In the press release of April 24, 2024, as per Section 35A of the Banking Regulation Act 1949, the Reserve Bank of India (RBI) has barred Kotak Mahindra Bank from
The concerns came into light when RBI conducted an audit of the years 2022 and 2023 and found that in this era of digital age, a leading private bank held 5 crore customers and 100,000 employees as of March 31, 2024, but lacked the IT infrastructure of the bank. For two years in a row, they were not able to comply with the rules for managing IT risks and ensuring the security of information, as set by the RBI. A very similar incident took place some time back with HDFC Bank as well. As per the sources, the RBI gave numerous chances to the Kotak Mahindra Bank to comply with the guidelines, but the bank's non-compliance after many chances led the RBI to take some serious actions. As a result, the major five concerns were seen.
Apart from strengthening their vendors, banks definitely need to upgrade themselves constantly and need to start strategizing their IT systems. The banking sector needs to have a robust IT system in order to run properly.
In the pandemic, we saw huge digital growth, for instance, in video KYC. COVID-19 has forced banks and their customers to adapt quickly to the limitations of physical interactions, giving rise to digital interactions.
On one side, the regulator's actions are appreciated because they help build market integrity; however, if we look into the account, the actions are pretty much delayed by the bank's side. Since the issues were highlighted in 2022 and 2023, the bank could have taken corrective action. When you are looking at wealth creation as a process in the economy, all the stakeholders, including regulators, have to be mindful of how they are taking actions. Kotak Mahindra is now on the path to taking corrective action. It will be very interesting to see how a bank like Kotak Mahindra will take care of the crisis situation. As of early morning on May 10, 2024, the stock trade was 10–11% lower on the Bombay Stock Exchange(BSI).
The incident has definitely came as a surprise for both the customers and the bank itself because this is a kind of embargo which will affect the bank not only onboarding new customers but also in the additions of new credit card because of deficiencies in the IT infrastructure and Data Management issues of the bank.
The press release has mentioned, “The bank shall, however, continue to provide services to its existing customers, including its credit card customers.” The bank failed to address the concerns in a comprehensive and timely manner. The reserve bank has found serious deficiencies and non-compliances in IT inventory management for consecutive years. RBI, along with the curbs on the bank, has also mentioned that the existing customers are free and there is no impact of the actions taken by RBI on already existing customers and card holders of Kotak Mahindra Bank.
A very similar issue was there with HDFC Bank, and it took them 18–20 months to clear the situation. As per the sources, the Kotak Mahindra Bank is going to hire a new external auditor who will perform the audit, and the audit will be checked and approved by the RBI. According to Sanjiv Bhasin in an interview with ET Now, “Kotak has been an underperformer, in the medium term, it will slightly underperform the bank nifty but over a period of time it will bounce back like HDFC”. If you are A long term investor this could be a time to use dip to do a sip in Kotak bank.
In the past, regulators have taken some tough and attentive actions, and Kotak is certainly not the last in a queue. Banks must have a strong IT infrastructure in order to survive in the sector. Based on previous trends, the bank will not be significantly damaged by the curbs and will recover quickly.
- issuing new or fresh credit cards and
- Onboarding of new customers through mobile, online banking channels, or any digital platform.
What led to Kotak Mahindra Bank's penalization?
The concerns came into light when RBI conducted an audit of the years 2022 and 2023 and found that in this era of digital age, a leading private bank held 5 crore customers and 100,000 employees as of March 31, 2024, but lacked the IT infrastructure of the bank. For two years in a row, they were not able to comply with the rules for managing IT risks and ensuring the security of information, as set by the RBI. A very similar incident took place some time back with HDFC Bank as well. As per the sources, the RBI gave numerous chances to the Kotak Mahindra Bank to comply with the guidelines, but the bank's non-compliance after many chances led the RBI to take some serious actions. As a result, the major five concerns were seen.
5 Big Concerns
- SCALABILITY OF THE CORE BANKING SYSTEM
- MULTIPLE OUTAGES OR DOWNTIME
- 30-40 HOURS OUTAGES IN A YEAR
- HIGH VOLUME OF DIGITAL TRANSACTIONS
- INADEQUATE INFRASTRUCTURE
Apart from strengthening their vendors, banks definitely need to upgrade themselves constantly and need to start strategizing their IT systems. The banking sector needs to have a robust IT system in order to run properly.
In the pandemic, we saw huge digital growth, for instance, in video KYC. COVID-19 has forced banks and their customers to adapt quickly to the limitations of physical interactions, giving rise to digital interactions.
On one side, the regulator's actions are appreciated because they help build market integrity; however, if we look into the account, the actions are pretty much delayed by the bank's side. Since the issues were highlighted in 2022 and 2023, the bank could have taken corrective action. When you are looking at wealth creation as a process in the economy, all the stakeholders, including regulators, have to be mindful of how they are taking actions. Kotak Mahindra is now on the path to taking corrective action. It will be very interesting to see how a bank like Kotak Mahindra will take care of the crisis situation. As of early morning on May 10, 2024, the stock trade was 10–11% lower on the Bombay Stock Exchange(BSI).
Do customers need to be concerned?
The incident has definitely came as a surprise for both the customers and the bank itself because this is a kind of embargo which will affect the bank not only onboarding new customers but also in the additions of new credit card because of deficiencies in the IT infrastructure and Data Management issues of the bank.
The press release has mentioned, “The bank shall, however, continue to provide services to its existing customers, including its credit card customers.” The bank failed to address the concerns in a comprehensive and timely manner. The reserve bank has found serious deficiencies and non-compliances in IT inventory management for consecutive years. RBI, along with the curbs on the bank, has also mentioned that the existing customers are free and there is no impact of the actions taken by RBI on already existing customers and card holders of Kotak Mahindra Bank.
What or how does the timeline look now?
A very similar issue was there with HDFC Bank, and it took them 18–20 months to clear the situation. As per the sources, the Kotak Mahindra Bank is going to hire a new external auditor who will perform the audit, and the audit will be checked and approved by the RBI. According to Sanjiv Bhasin in an interview with ET Now, “Kotak has been an underperformer, in the medium term, it will slightly underperform the bank nifty but over a period of time it will bounce back like HDFC”. If you are A long term investor this could be a time to use dip to do a sip in Kotak bank.
In the past, regulators have taken some tough and attentive actions, and Kotak is certainly not the last in a queue. Banks must have a strong IT infrastructure in order to survive in the sector. Based on previous trends, the bank will not be significantly damaged by the curbs and will recover quickly.