What Led To RBI's Restrictions On Kotak Mahindra Bank

On Wednesday, Reserve Bank of India directed the private lender to "cease and desist" the issuances of fresh credit cards and onboarding of new customers through online and mobile banking channels.

Despite several calls from the regulator to take corrective action, the bank seemingly failed to produce a satisfactory plan on fixing these loopholes, the RBI had said in its release on Wednesday.

According to the persons quoted above, multiple outages in 2022 and 2023, along with lack of robust remedial action to address customer grievances were some of the regulator's concerns with Kotak Mahindra Bank.

At least 30–40 hours of outages on digital banking channels, including the UPI, were reported in a year, according to three persons who spoke to NDTV Profit. This, evidently, raised concerns over scalability of the lender's core banking system.

Even on April 15, several Kotak Mahindra Bank customers raised alarms about being unable to make UPI-related transactions for some hours in a day. The bank, as a result, faced a lot of criticism from customers on social media.

Core banking system at a bank is a back-end platform that processes daily banking transactions and posts updates to accounts and other financial records. This system typically includes deposit, loan and credit processing capabilities, with interfaces to general ledger systems and reporting tools.

By principle, the bank under audit ought to submit a remedial plan of action to RBI. And some of these solutions were in the process of completion, the persons said.

The resilience of the bank's IT infrastructure is under question and whether the tech platforms deployed by the bank are capable of handling high-volume digital transactions effectively, one of the persons said.

In its supervisory action statement, the RBI said that it observed a rapid growth in the volume of digital transactions, including those pertaining to credit cards. However, two persons said it was the high-volume of UPI transactions that also contributed to the issue as the bank's servers were not enough to handle it.

In terms of restrictions on issuance of fresh credit cards, a weak integration of APIs for co-branded credit cards, was a likely concern for the RBI's crackdown, according to one of the persons.

The regulator's action also throws light on the idea that customer protection and grievance redressal, must be at the centre of all regulated entities, the persons said.

The development with regards to Kotak Mahindra Bank is akin to what happened at HDFC Bank Ltd. and Bajaj Finance Ltd in recent years. It raises alarms on the efficiency of IT infrastructure at Indian banks, and the reasons for such discrepancies.

After the RBI's release, the bank asserted that the restrictions would not materially impact its overall business. "The bank has taken measures for adoption of new technologies to strengthen its IT systems and will continue to work with (the) RBI to swiftly resolve balance issues at the earliest," it said.

Queries sent to RBI and Kotak Mahindra Bank did not elicit a response till the time of publishing this story.