In an unexpected jolt to Kotak Mahindra Bank and its investors, the Reserve Bank of India (RBI) enforced strict regulatory measures on the banking giant, prompting a sharp 10.85% fall in its share value on Thursday’s stock market. Kotak Mahindra Bank’s stock tumbled to Rs 1,643 on the BSE as the market reacted to the RBI directive that prohibited the bank from adding new customers via its popular online and mobile platforms and halted the issuance of fresh credit cards. This sudden development served as a grim reminder of the central bank’s vigilance in monitoring the sector, echoing similar disciplinary actions imposed on HDFC Bank in 2020 and more recently, Paytm.
Amidst the market uproar, the bank attempted to reassure its existing customer base that services would remain unaffected, clarifying that the transactions via credit cards, mobile, and net banking would continue without interruption. The bank’s physical branches would also maintain business as usual, save for the newly restricted functions. “Our branches continue to welcome and onboard new customers, providing them with all the bank’s services, other than issuance of new credit cards,” the bank stated, trying to quell any immediate concerns amongst its clientele.
Such regulatory crackdowns are not novel, as seen with past RBI restrictions that signified its unwavering commitment to consumer protection and prudent operational governance within the banking sector. The RBI’s recent reprimand of Kotak Mahindra Bank comes on the heels of what the regulatory body perceived as lapses in its IT Risk and Information Security Governance for the years 2022 and 2023. These deficiencies underline the importance the RBI places on technological infrastructure and security within the financial industry – a factor increasingly critical in an era where digital transactions dominate.
“Today, financial transactions are mostly driven by technology and as a watchdog, it is RBI’s responsibility to ensure a safe and secured digital environment,” explains Siddarth Bhamre, Head of Research at Asit C. Mehta Investment Interrmediates Ltd. He stresses the necessity for financial institutions to not only invest but also continuously update and upgrade their technological systems to secure user interfaces and sustain growth trajectories.
The RBI’s proactive approach in preemptive measures to prevent systemic risks cannot be understated. “It has time and again shown that it’s a proactive institution. Be it monetary policy or regulatory action, the RBI has taken steps to mitigate systemic risk before it raises its ugly head,” added Bhamre, highlighting the RBI’s role in pre-empting and curtailing financial crises.
For Kotak Mahindra Bank, these restrictions pose substantial impediments, particularly in relation to their projected plans. Shivaji Thapliyal, Head of Research and Lead Analyst at YES Securities, observes the ban’s significance given the bank’s strategy to increase its share of unsecured retail to mid-teens in the coming years, a step up from the current slightly over 10%. “Credit card book, per se, is about 4% of KMB loan book. Due to the ban, KMB will be stopped in its tracks from normalizing its business model from being underweight on unsecured retail,” Thapliyal notes, bringing to mind HDFC’s lost market share in credit card spends when it faced a similar ban.
He also points out the potential impact on the bank’s 811 digital bank accounts, which have been instrumental in adding to the bank’s liability accounts. While such accounts might hold limited balance value initially, their potential for growth is significant. With the new regulations, however, “presently, such accounts cannot be added,” states Thapliyal, outlining the immediate limitations thrust upon Kotak Mahindra Bank in the wake of the RBI’s move.
In the grand scheme, these developments underscore the delicate balance between aggressive growth ambitions and the need for robust risk management and IT security frameworks within financial institutions. As investors absorb the aftermath of RBI’s stringent actions, Kotak Mahindra Bank faces a challenging road ahead to align its operations with regulatory expectations and restore investor confidence.
