RBI’s Supervisory Action against Kotak Mahindra; Banned from Issuing New Credit Cards and Onboarding New Customers

The Reserve Bank of India (RBI) barred Kotak Mahindra Bank from onboarding new customers online and issuing new credit cards with immediate effect.

In a press release, RBI said, “The Reserve Bank of India has today, in the exercise of its powers under Section 35A of the Banking Regulation Act, 1949, directed Kotak Mahindra Bank Limited (hereinafter referred to as ‘the bank’) to cease and desist, with immediate effect, from (i) onboarding of new customers through its online and mobile banking channels and (ii) issuing fresh credit cards. The bank shall, however, continue to provide services to its existing customers, including its credit card customers.”

These actions are necessary due to major concerns raised by the Reserve Bank’s IT examination of the bank for the years 2022 and 2023, as well as the bank’s continuous failure to address these concerns comprehensively and quickly. Serious weaknesses and non-compliances were discovered in the areas of IT inventory management, patch and change management, user access management, vendor risk management, data security and leak prevention plan, business continuity and disaster recovery rigour and drill, among others.

For two consecutive years, the bank was assessed to be deficient in its IT Risk and Information Security Governance, contrary to requirements under Regulatory guidelines. During the subsequent assessments, the bank was found to be significantly non-compliant with the Corrective Action Plans issued by the Reserve Bank for the years 2022 and 2023, as the compliances submitted by the bank were found to be either inadequate, incorrect or not sustained.

In the absence of a strong IT infrastructure and an IT Risk Management framework, the bank’s Core Banking System (CBS) and its online and digital banking channels have experienced frequent and significant outages in the last two years, with the most recent being a service disruption on April 15, 2024, causing significant customer inconvenience. The bank is determined to be significantly lacking in establishing the requisite operational resilience as a result of its failure to construct IT systems and controls in line with its growth.

The Reserve Bank has been in continual high-level interaction with the bank on all of these issues over the last two years in order to increase its IT resilience, but the results have been far from adequate. It has also been observed that the amount of the bank’s digital transactions, particularly credit card transactions, has recently increased significantly, putting additional pressure on the IT infrastructure.

The Reserve Bank, therefore, has decided to place certain business restrictions on the bank as mentioned above, in the interest of customers and to prevent any possible prolonged outage which may seriously impact not only the bank’s ability to render efficient customer service but also the financial ecosystem of digital banking and payment systems.

The restrictions now being imposed will be reviewed upon completion of a comprehensive external audit to be commissioned by the bank with the prior approval of RBI, and remediation of all deficiencies that may be pointed out in the external audit as well as the observations contained in the RBI Inspections, to the satisfaction of the Reserve Bank. Further, these restrictions are without prejudice to any other regulatory, supervisory or enforcement action that may be initiated against the bank by the Reserve Bank.