RBI Bars HDFC Bank From Digital Launches, Sourcing New Credit Card Customers

RBI puts limits on new digital business for HDFC Bank, after technical outages.

A customer uses an HDFC Bank Ltd. mobile automated teller machine (ATM) van in a residential neighborhood of Mumbai. Photographer: Dhiraj Singh/Bloomberg
A customer uses an HDFC Bank Ltd. mobile automated teller machine (ATM) van in a residential neighborhood of Mumbai. Photographer: Dhiraj Singh/Bloomberg

The Reserve Bank of India has asked HDFC Bank Ltd. to put a temporary halt to all digital banking launches and sourcing of new credit card customers. This comes after the lender faced a series of technical glitches over the last two years.

In a statement to exchanges, India’s largest private lender said the RBI has issued an order dated Dec. 2, 2020, with regard to “certain incidents of outages in internet banking/ mobile banking/ payment utilities of the bank over the past two years, including the recent outages in the bank’s internet banking and payment system on Nov. 21, 2020, due to a power failure in the primary data  centre.”

In the order, the RBI has asked the bank to temporarily stop:

  • All  launches of digital business generating activities planned under its program Digital 2.0
  • Other proposed business generating IT applications
  • Sourcing of new credit card customers

The RBI has also asked the bank’s board to examine the lapses and fix accountability.

HDFC Bank said that the lifting of the regulatory measures would be considered after satisfactory compliance with critical observations made by the RBI. The bank said it will ensure that the current supervisory actions don’t impact existing card customers, digital banking channels and other operations.

“The bank believes that these measures will not materially impact its overall business,” HDFC Bank said in the exchange notification.

CEO’s Message To Customers

In a letter to customers posted on HDFC Bank’s website, Managing Director and Chief Executive Sashidhar Jagdishan said the lender had sometimes been unable to live up to the expectations of the customers and apologised for the same. He also assured existing customers that they can conduct their transactions with the bank without any restrictions.

Speaking about the outages in the bank’s digital services, the chief executive noted that on Nov. 21 a power outage at the bank’s primary data centre had caused problems to customers. The bank will be working on war footing to fix these issues, he said.

“Some of our strategic digital initiatives to improve the front end digital experience, improve digital origination, straight through processing, next generation of mobile and internet banking, APIs based banking on the edge etc would now be readied and launched post the approval and clearance from regulator,” Jagdishan said in his letter.

HDFC Bank will be working with experts and the regulator to fortify the identified areas for improvement, he said.

Not A One-Off

HDFC Bank has now faced more than one technical outage over the last few months.

In November, the private bank said its services had faced technical issues because of a power outage at one of its data centres in Mumbai. This despite the fact that banks are required to have business continuity processes in place to deal with any such events.

Prior to that, in December 2019, HDFC Bank’s customers had faced disruption for two consecutive days, when they were unable to transfer cash or make any digital payments. The bank cited “technical glitches” as the reason.

A year before that, the bank had rolled out its new net-banking application, which quickly led to glitches for users and forced the bank to rollback the launch.

These technical troubles, at one of India’s most digitally active banks, have now drawn the attention of the regulator.

According to monthly data available with the RBI, HDFC Bank is the highest issuer of credit cards in the country, with 1.5 crore cards in force as on Sept. 30. About 91.5% of the total transactions it recorded came from digital channels, according to the bank’s annual report for the year ended March 31, 2020.

The annual report also noted that the bank had created a digital transaction monitoring committee to promote such services. The committee, headed by board member Srikanth Nadhamuni, is also in charge of reviewing customer services on the digital banking framework for the lender. Last month, the bank also announced that it had appointed Ramesh Lakshminarayanan as chief information officer, nearly four months after predecessor Munish Mittal left to pursue higher education.

Strong Message With Implications

While the bank has assured that the RBI’s strictures will not impact existing business, there could be implications for planned launches.

The measures will delay the launch of HDFC Bank's auto loan portal they were looking to launch this year, said Gautam Chhugani, director- financial and fintech, Bernstein Research.

What the regulator has done is set a precedent for other banks. Penalties are not deterrent enough, so the RBI went for business related measures to force banks to fix their IT infrastructure. As such, this problem is not something which can be fixed by the regulator. Legacy infrastructure has to be upgraded by the bank, as a matter of business.
Gautam Chhugani, Director- Financial and Fintech, Bernstein Research

A payment industry executive, speaking on condition of anonymity, said that legacy core banking infrastructure of most banks is not equipped to handle such a large volume of transactions done via UPI or other digital payment interfaces. This is particularly true for older private and public sector banks that handle the maximum transaction volumes,

While banks have tried to solve the issue by doing some upgrades, those are more like putting bandage to solve the immediate glitches, but the infrastructure that was designed a decade-ago, still remains incompetent to manage the large UPI or digital transaction volumes, this person said.

Brett King, author of Bank 4.0 and founder of Moven, a mobile financial services provider, said such technical outages are a symptom of legacy bank technologies strained by a rapid increase in the use of digital channels.

“Like many incumbents, HDFC Bank has an IT culture built on internal build versus partnerships, core reliance versus strong middleware, and resistance to technology that would cannibalise the branch business,” King said. “The skillsets needed for cloud-based, real-time interactions across multiple new technology layers are pushing against this culture.”