RBI restricts Kotak Mahindra Bank's online customer onboarding

Kotak Mahindra Bank is facing restrictions from the RBI after it was directed to stop new customer onboarding through online and mobile banking channels, as well as issuing fresh credit cards. This action was taken under Section 35A of the Banking Regulation Act, 1949, to prevent actions that could harm depositors' interests or the bank itself.

Existing customers of Kotak Mahindra Bank will not be affected by these onboarding restrictions, and the bank can continue providing services to them. The RBI's decision came after finding serious deficiencies in various areas of the bank's IT management, including inventory management, user access management, and data security.

The central bank highlighted that Kotak Mahindra Bank failed to comply with corrective action plans issued for the years 2022-23. The bank's IT infrastructure has experienced frequent and significant outages, causing inconvenience to customers. Despite high-level engagements with the bank to improve IT resilience, the outcomes were not satisfactory.

Moreover, the RBI noted a rapid increase in digital transactions by the bank, putting further strain on its IT systems. Banking regulations have prompted similar actions against other institutions like SBM Bank India, Bank of Baroda, Paytm Payments Bank, HDFC Bank, and Bajaj Finance for diverse compliance issues.

The future of Kotak Mahindra Bank may be impacted by the RBI's actions. Analysts foresee challenges in growth, net interest margins, and fee income in the short to medium term. The bank's share price witnessed a significant decline following the announcement, with brokerage firms revising their price targets downward.

Jefferies, for instance, has revised down its price target on Kotak Mahindra Bank and retained a ‘hold’ recommendation. Analysts from other financial institutions, such as CLSA and Nomura, foresee a moderate effect on the bank's profitability but highlight the risk to its reputation.

The RBI's directives aim to address deficiencies in Kotak Mahindra Bank's operations and ensure compliance with regulatory standards. However, the repercussions of these actions on the bank's performance and reputation remain to be seen in the coming months. The banking sector will closely monitor these developments.