New customer onboarding banned for Kotak Mahindra Bank

Kotak Mahindra Bank has been in the news for a while now - one of the reasons for it is that its share price has not performed at all. In the last 5 years, the share price has remained flat. In the last week of April, the bank was back in the news, and this time for a different reason.

The Reserve Bank of India (RBI) has asked the bank to stop onboarding new customers through online and mobile banking channels. On top of it, the central bank has barred Kotak Bank from issuing fresh credit cards with immediate effect. In this blog, we look at the details of this ban and what to expect from the bank in the future.

Reasons for a ban on customer onboarding

Whenever RBI issues such bans on banks, it is backed by some reasons. Here are some reasons for the ban:

The top reason for this ban is that the central bank has found 'significant concerns' in the IT department of Kotak Bank since 2022. There has been a 'continued failure on the part of the Kotak Bank to address these concerns in a comprehensive and timely manner'.
Due to the lack of the bank's strong IT system, it has had several problems with its digital banking services (online) over the past two years. One such issue happened on 15 April 2024, which impacted a large customer base.
The last reason is inadequate responses from the bank's end. The RBI felt that Kotak Mahindra Bank had not adequately addressed these issues despite warnings and corrective action plans issued in 2022 and 2023.

History of the issue and RBI's involvement

For the last few years, the central bank has been taking its regulatory role seriously - as we have seen a few months back how to stop Paytm Payments bank from carrying out its operation.

Over the past two years, the central bank has been in regular high-level engagement with the Kotak bank on all the various concerns - the aim was to strengthen the IT system, but the outcomes have not been satisfactory. The bank has submitted a compliance statement, but, as per RBI, the statements submitted by the bank were inadequate, incorrect, or not sustained.

Impact of ban on Kotak Mahindra Bank

Here are some of the direct and indirect impacts of the ban on Kotak Mahindra Bank:

The ban has turned investors' sentiment negative - the bank shares have fallen more than 10% post the ban.
One of the biggest impacts is the reputational damage that has come with a ban - the same is acknowledged by the CEO. The bank prides itself on its digital offering and innovation. The RBI's action could erode customer trust and confidence in the bank's technological capabilities.
The ban, if it stays for a long, will restrict Kotak Mahindra Bank's growth potential. They can't acquire new customers as easily through their preferred digital channels and credit cards. In a similar credit bank ban on HDFC bank, the bank saw its market share fall from 25.3% in December 2020 to 23.1% in August 2021.

Impact on Kotak Mahindra Bank's existing customers

Existing customers are not affected significantly. RBI has clarified there is no need for existing customers to worry as the bank will continue to provide services to existing customers, including credit card ones. Furthermore, The orders do not prevent the bank from onboarding new customers through its branches or issuing new debit cards.

While core services remain accessible, some customers who heavily rely on digital onboarding processes for new products or services might face minor hurdles. For example, if a customer wants to open a new fixed deposit or apply for a loan, they might need to visit a physical branch instead of doing it online.

Future ahead

The bank released a statement saying that it has taken measures to 'adopt 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. Our branches continue to welcome and onboard new customers, providing them with all the bank’s services, apart from issuance of new credit cards", the statement read.

If you look at the current scenario, the Kotak Mahindra Bank can go both south and north from the current situation. Though it is difficult to predict the chances of which are higher, we can tell the situations which will change the outlook to positive and negative.

Positive Outlook

Swift Resolution: If Kotak Mahindra Bank can quickly fix the IT deficiencies and satisfy the RBI's requirements, the ban could be lifted relatively soon (potentially within a year, based on past examples with other banks).
Strengthened Infrastructure: A robust IT infrastructure will not only get them back in the RBI's good graces but also improve their overall security and operational efficiency.
Rebuilding Trust: By taking customer concerns seriously and communicating transparently throughout the process, Kotak Mahindra Bank can rebuild trust and potentially emerge stronger.

Negative Outlook

Prolonged Ban: A lengthy delay in resolving the IT issues could lead to a longer ban, impacting customer acquisition and financial performance.
Eroded Reputation: A prolonged ban, coupled with negative publicity, could significantly erode customer trust and confidence in the bank's digital capabilities.
Loss of Market Share: While existing customers are less likely to switch, prolonged restrictions on new customer acquisition could benefit competitor banks, especially those with strong digital offerings.

Conclusion

There is no doubt the central bank's move to prohibit Kotak Mahindra Bank from acquiring new customers online or issuing fresh credit cards is a significant setback. However, it is already done - the ban is in place. Investors and customers should look forward to how quickly the bank can address RBI's concern.

One good thing that has happened for the bank post the ban is their better-than-expected March quarter results. If you have not checked it yet, click here.