It was in September 2023 that Uday Kotak, the founder, MD and CEO of Kotak Mahindra Bank stepped down. The Reserve Bank of India had in 2021 capped the maximum tenure of MD and CEOs at 15 years. So, Kotak was due to retire by the end of December 2023. Subsequently, international banker Ashok Vaswani, who had earlier been the CEO of British Bank Barclays, was announced as his successor, effective January 1, 2024.
Just under four months after taking charge, Vaswani finds himself up against a big challenge after the central bank directed the private sector lender to stop onboarding new customers through online and mobile banking channels. The lender has also been barred from issuing fresh credit cards with immediate effect.
Kotak Bank shares plunged more than 11 per cent on the BSE on the back of the RBI action, which the banking regulator said was necessitated based on significant concerns arising out of its IT examination of the bank for the years 2022 and 2023, and the continued failure on part of the bank to address these concerns in a comprehensive and timely manner.
"For two consecutive years, the bank was assessed to be deficient in its IT risk and information security governance, contrary to requirements under regulatory guidelines. During the subsequent assessments, the bank was found to be significantly non-compliant with the corrective action plans issued by the Reserve Bank for the years 2022 and 2023, as the compliances submitted by the bank were found to be either inadequate, incorrect or not sustained," said RBI.
It further added that in the absence of a robust IT infrastructure and IT risk management framework, the bank’s core banking system and its online and digital banking channels had suffered frequent and significant outages in the last two years, the recent one being a service disruption on April 15, 2024, resulting in serious customer inconveniences.
"In the past two years, the Reserve Bank has been in continuous high-level engagement with the bank on all these concerns with a view to strengthen its IT resilience, but the outcomes have been far from satisfactory," stressed RBI.
This is not the first time that RBI has taken such a decision against any lender. In December 2020, RBI imposed several restrictions on HDFC Bank following multiple outages in internet and mobile banking channels at the country’s largest private sector lender. HDFC Bank too had to temporarily stop all launches of the digital business generating activities and sourcing of new credit card customers.
More recently, in October 2023, state-owned Bank of Baroda was barred from onboarding new customers through its BoB World mobile app.
Kotak 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.
But, a resolution may not be too soon. A review of the restrictions post completing corrective actions and an external audit can take 6-12 months, say analysts. HDFC Bank, for instance, got a partial relief on its restrictions only in August 2021, eight months after they were imposed.
Such restrictions on onboarding new customers or issuing new credit cards typically hurt a lender's growth plans and can dent market share over time. Shivaji Thapliyal, head of research and lead analyst, YES Securities noted that HDFC Bank had ended up losing market share in credit card spends over a period of time, and the ban on incremental credit card issuance had a reasonable significance for Kotak Bank too.
"It is part of Kotak Mahindra Bank’s (KMB) stated strategy to increase the share of unsecured retail to mid-teens over the next few years (from a little over 10 per cent currently). Credit card book, per se, is about 4 per cent of KMB loan book. Due to the ban, KMB will be stopped in its tracks from normalizing its business model from being underweight on unsecured retail," said Thapliyal.
In the last few years, Kotak Bank has seen a lot of traction on new customer additions through the digital banking platform Kotak 811. Just like other lenders, it too has seen strong growth on its digital channels. For instance, 99 per cent of new credit cards and 95 per cent of new personal loans by volume were disbursed digitally, according to a presentation by Kotak Bank post-December quarter earnings.
Anand Dama of Emkay Global Financial Services said the "restrictions should impact business growth, including KMB's already dwindling CASA (current account and savings account) ratio (down 13 per cent from its peak to 48 per cent) and its new card acquisition; this will lead to earnings being hit in the medium term."
“The regulatory overhang would delay any hope of a re-rating post the recent management change,” added Dama.