The Kotak Mahindra Bank Controversy

What’s in today’s article?

• Why in News?
• Why were Actions on KMB Necessitated?
• Similar Actions by RBI in the Past
• What will be the Impact of RBI’s Actions on KMB?

Why in News?

• The Reserve Bank of India (RBI) barred Kotak Mahindra Bank (KMB) from onboarding new customers on its online and mobile banking channels, and issuing fresh credit cards.
• It would however be allowed to provide these services to its existing customers.

Why were Actions on KMB Necessitated?

• RBI observed “serious deficiencies and non-compliances” concerning KMB’s -
  • IT inventory and user access management,
  • Data leak and leak prevention strategy,
  • Business continuity and
  • Disaster recovery rigour and drill, etc.
• This was based on the regulator’s examination of the private bank’s systems for two years (2022 and 2023).
• The regulator said KMB continually failed to address concerns in a “comprehensive and timely manner”.
• The bank was also deemed non-compliant with RBI’s subsequent recommendations or ‘Corrective Action Plans’ (CAPs).
  • CAPs are part of an intervention scheme of the RBI to ensure robustness of regulated entities.
  • As per the RBI, the compliances submitted by KMB were either “inadequate, incorrect or not substantiated”.
• In the absence of robust IT infrastructure and risk management systems, KMB’s online and digital banking channels have suffered frequent and significant outages in the last two years.
  • In the latest incident, the bank’s customer care representative informed that its technical servers were experiencing “intermittent slowness”.
• The current measures would be reviewed in an external audit to be commissioned by the bank with RBI’s approval to assess remediation undertaken.

Similar Actions by RBI in the Past:

• The RBI has been particularly wary of how digital banking and the overall financial landscape functions.
• In (December) 2020, the regulator had ceased HDFC from launching any new digital products and sourcing new credit card consumers.
  • This was also based on a two-year assessment that had come across recurrent incidents of outage in its internet and mobile banking platforms, alongside payment utilities.
  • The restrictions were lifted more than a year later in (March) 2022 after a successful remediation.
• On similar lines, the RBI in (October) 2023 directed the Bank of Baroda to suspend any fresh onboarding of customers onto its ‘bob World’ mobile application.
  • This was also based on “certain material supervisory concerns” with the RBI demanding the rectification of observed deficiencies.

What will be the Impact of RBI’s Actions on KMB?

• KMB’s growth trajectory for retail products was aided by a higher mix of digital sourcing and a thrust on unsecured products.
  • For perspective, the private lender sold 95% of their personal loans and 99% of their (fresh) credit cards by digital means.
  • The banks’ net profit in the fourth quarter rose 18% to ₹4,133 crore from ₹3,496 crore in the year-ago period. This was on the back of a 13% YoY growth in net interest income at ₹6,909 crore.
• According to S&P Global Ratings, the regulatory action may set back the bank’s credit growth and profitability.
• It added that credit cards are among the higher-yielding target growth segment of the bank. The portfolio grew 52% YoY as on December 31 last year compared with a total loan growth of 19%.
• Action by the RBI could push the bank to rely more on physical branch network expansion to supplement growth thus entailing higher operating costs.
• However, the agency maintained that RBI’s action will not “materially affect” its ratings.
  • This is because credit cards accounted for only 4% of the bank’s total loans at the end of the year and it would still be able to cross-sell its products.
• However, the bank’s CEO stated that while the financial impact (from the RBI action) is expected to be minimal, he was more worried about the “reputational impact”.
• S&P anticipates KMB to potentially take a year to fully address RBI’s key concerns.
  • While the bank has made “significant progress” on technological enhancements, implementing changes and the external audit will take time.

Q.1. How does RBI supervise commercial banks?

The Banking Regulation Act, 1949 empowers the Reserve Bank of India to inspect and supervise commercial banks. These powers are exercised through on-site inspection and off-site surveillance.

Q.2. What is Prompt Corrective Action Framework (PCA) by RBI?

PCA is a system that the RBI imposes on banks showing signs of financial stress. The regulator considers banks as unsafe if they fail to meet the standards on certain financial metrics or parameters.