Regulatory noose: Is it a crackdown or a clean-up? Well, the Reserve Bank of India in its latest tightening of regulatory noose acted on the Kotak Mahindra Bank, the fifth most valuable private lender in the nation. The central bank directed Kotak Mahindra Bank to halt onboarding new customers online and through mobile banking platforms immediately. This directive comes in light of data security concerns and deficiencies in the bank's IT infrastructure for the years 2022 and 2023, as highlighted by the RBI.

Why The Action?

The RBI pointed out serious deficiencies and non-compliances in various aspects of IT management, including inventory management, patch and change management, user access management, vendor risk management, and data security measures.

Despite being given specific plans to address these issues, Kotak Mahindra Bank failed to rectify them, leading to continued concerns regarding its IT resilience.
The RBI also noted that the bank experienced several major outages in its core banking system and online services over the past two years, attributed to inadequate IT infrastructure and risk management. These issues culminated in a significant service disruption on April 15, affecting the bank's customers.

Given the exponential growth in digital transactions, particularly credit cards, the RBI imposed business restrictions on Kotak Mahindra Bank to safeguard customer interests and prevent prolonged outages that could disrupt the financial ecosystem.

However, existing customers, including credit cardholders, will not be affected, as the bank will continue to provide uninterrupted services to its current customer base.

In response, Kotak Mahindra Bank assured its existing customers of seamless access to banking services, including credit card, mobile, and net banking. The bank emphasised its commitment to adopting new technologies to strengthen its IT systems and pledged to work closely with the RBI to address the identified issues promptly.

Stock Rout

As a consequence of the RBI crackdown on Kotak Mahindra Bank, the shares plunged by as much as 10 per cent. On the other hand, Axis Bank shares surged 4 per cent after it reported better-than-expected earnings.

Axis Bank surged past Kotak Mahindra Bank on Thursday to claim the title of India's third most-valued private lender. The reversal came as Kotak Bank's shares plummeted following the RBI’s decision to impose restrictions on the bank's digital customer onboarding and credit card issuance.

Kotak Bank's stock opened sharply lower on Thursday in response to the RBI's move, closing a staggering 11 per cent down at Rs 1,643 per share on the Bombay Stock Exchange (BSE). This downturn translated into a significant loss for shareholders, amounting to nearly Rs 40,000 crore as the bank's market capitalization dwindled to Rs 3.3 lakh crore.

With a market capitalisation of Rs 3.5 lakh crore, Axis Bank seized the opportunity to claim the fourth position among India's most valued lenders. The top three positions remain occupied by HDFC Bank (Rs 11.5 lakh crore), ICICI Bank (Rs 7.8 lakh crore), and the state-owned SBI (Rs 7.3 lakh crore).

The downturn in Kotak Bank's fortunes also had personal ramifications for its founder, Uday Kotak, whose wealth saw an erosion of $1.2 billion. Kotak, who holds a 25.71 per cent stake in the bank, witnessed a decline in his holding's value by approximately Rs 10,300 crore.

Not the first and last

This isn't the first instance of the RBI taking regulatory action against financial institutions. In the past five years, the RBI has come down heavily on many banks, fintechs, and apps.

The RBI imposed business restrictions on Paytm Payments Bank on January 31, 2023, due to repeated violations of norms and non-compliance with rules. The bank was barred from accepting fresh deposits and conducting credit transactions after February 29.

In October 2023, the apex bank directed the Bank of Baroda to suspend onboarding customers onto the ‘BoB World’ mobile application due to material supervisory concerns.

Similarly, the RBI crackdown on HDFC Bank's internet outages: In December 2020, the RBI instructed HDFC Bank to halt all launches of its forthcoming digital business-generating activities and the sourcing of new credit card customers following recurring outages at its data centre.