Experts claim that Kotak Mahindra Bank's actions indicate the RBI's intention to eliminate systemic deficiencies in the banking sector

Experts claim that Kotak Mahindra Bank's actions indicate the RBI's intention to eliminate systemic deficiencies in the banking sector

Kotak Mahindra Bank (KMB) was subject to business limitations on April 24 by the Reserve Bank of India (RBI). These limits prevented the lender from issuing new credit cards and from acquiring new clients via digital channels. Experts anticipate that this will affect their income.

Experts noted that the Reserve Bank of India's (RBI) decision to impose business limitations on Kotak Mahindra Bank due to non-compliance with IT inventory management guidelines indicates the central bank's readiness to mitigate systemic risks in the banking industry.

They went on to say that other lenders in the sector would probably become more watchful of their adherence to the rules as a result of the decision.

According to Karan Gupta, Director & Head of Financial Institutions, India Ratings & Research, "the regulator's action has a very clear intent: they do not want any systemic risk arising from gaps that they have identified and highlighted to the banks."

Furthermore, the steps taken to mitigate systemic risks in the banking industry as a whole, according to Shreyansh Shah, Research Analyst at StoxBox, go well beyond entity-level measures.

Limitations

Kotak Mahindra Bank (KMB) was subject to business limitations on April 24 by the Reserve Bank of India (RBI). These limits prevented the lender from issuing new credit cards and from acquiring new clients via digital channels.

The RBI claimed that the bank's "continued failure" to address concerns led to the measures taken after it examined the bank's IT systems during the previous two years.

According to the RBI, Kotak may continue to provide its credit card users and other current clients its services unaffected by the prohibition.

"These actions are necessitated in accordance with significant concerns arising out of Reserve Bank’s IT Evaluation of the bank for the years 2022 and 2023 and the continued failure of the leadership of the bank to address these concerns in a comprehensive and timely manner," the central bank said.

In the areas of IT inventory management, repairs and change management, user access executives, vendor risk management, data protection and information leak prevention strategy, business continuity and disaster recovery rigor and drill, and so forth, the central bank claims that significant flaws and non-compliance were evident.

This move sends a message to the banking sector telling them to follow all requirements and to make sure their system is strong enough. According to Sanjay Agarwal, Senior Director at CareEdge Ratings, "I don't think any bank has that mentality to not follow the regulations; in many cases, it may become interpretation, and RBI keeps clarifying."

Effect on Enterprise

According to analysts, Kotak Mahindra Bank's business constraints are anticipated to hinder the bank's development and, in the medium run, negatively affect its profitability.

Restrictions on Kotak Mahindra Bank, according to a research by Emkay Global Financial Services, would have an effect on business development and the bank's already declining CASA ratio (which is down 13% from its peak to about 48%).

The research also said that it would have an effect on the purchase of new cards (CIF growth at 21% year over year and spending at 34% year over year).

The assessment further said, "Furthermore, the regulatory overhang would delay the possibility of a re-rating post the recent management change."