Why has RBI barred Kotak Mahindra Bank from onboarding new customers via online, mobile channels?

In addition to barring the onboarding of new customers via online channels, the RBI has also forbidden Kotak Mahindra Bank from issuing new credit cards.

A man walks past the Kotak Mahindra Bank branch in New Delhi, India, September 6, 2017. REUTERS/Adnan Abidi/File Photo

The Reserve Bank of India (RBI) on Wednesday (April 24) asked Kotak Mahindra Bank to stop onboarding new customers through online and mobile banking channels, and also barred it from issuing fresh credit cards, with immediate effect. As of March-end, Kotak Mahindra Bank has issued 59.54 lakh credit cards. Here is what the RBI said, and the reason behind its actions.

What exactly did RBI say on Kotak?

The banking regulator directed Kotak Mahindra Bank to “cease and desist”, with immediate effect, from “onboarding of new customers through its online and mobile banking channels” and “issuing fresh credit cards”. This was done under Section 35A of the Banking Regulation Act, 1949, which gives the RBI the power 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”.

What triggered these actions?

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.

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“Serious deficiencies and non-compliances were observed in the areas of IT inventory management, patch and change management, user access management, vendor risk management, data security and data leak prevention strategy, business continuity, and disaster recovery rigour and drill,” the RBI said in a release. During subsequent assessments, the bank was also found to be significantly non-compliant with the Corrective Action Plans issued by the RBI for 2022 and 2023, with compliances submitted by the bank either inadequate, incorrect, or not sustained, the regulator said.

Were there any concerns related to customer service?

The RBI said that in the absence of a robust IT infrastructure and risk management framework, the bank’s Core Banking System (CBS), and its online and digital banking channels have suffered frequent and significant outages in the last two years (most recently on April 15, 2024), resulting in serious customer inconvenience. The bank was found to be materially deficient in building necessary operational resilience on account of its failure to build IT systems and controls commensurate with its growth, the RBI noted.

Did RBI engage with the bank before taking action?

In the past two years, the regulator has been in continuous high-level engagement with the bank on all these concerns. RBI also observed that, of late, there has been rapid growth in the volume of the bank’s digital transactions, including transactions pertaining to credit cards, which is building further load on the IT systems.

The Reserve Bank said it has decided to place certain business restrictions on the bank in the interest of customers and to prevent any possible prolonged outage, which may seriously impact the bank’s ability to render efficient customer service, as well as the financial ecosystem of digital banking and payment systems.

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So, what happens to Kotak Mahindra Bank’s existing customers?

The RBI said Kotak Mahindra Bank will continue to provide services to its existing customers, including its credit card customers.

How has Kotak Mahindra Bank responded?

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 statement also said: “The Bank 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. We want to reassure our existing customers of uninterrupted services, including credit card, mobile and net banking,” the bank said.