Mumbai, 24 April

Cracking down on repeated non-compliance of IT norms, the RBI on Wednesday barred Kotak Mahindra Bank from onboarding new customers through its online and mobile banking channels and issuing fresh credit cards with immediate effect after the regulator found "serious deficiencies" in the lender's IT risk management.

These actions, the RBI said, are necessitated based on significant concerns arising out of Reserve Bank's IT examination of the bank for the years 2022 and 2023 and the continued failure on part of the bank to address these concerns in a comprehensive and timely manner.

Meanwhile, Kotak Mahindra Bank said in a statement that it has taken measures for adoption of new technologies to strengthen its IT systems and will continue to work with RBI to swiftly resolve balance issues at the earliest. In an almost similar action, the RBI in December 2020 had barred HDFC Bank from issuing new cards and launching new digital initiatives after repeated instances of technological outages at the lender. The restrictions were later lifted in March 2022.

In a statement regarding the supervisory action against Kotak Mahindra Bank, the RBI said: "Serious deficiencies and non-compliances were observed in the areas of IT inventory management, patch and change management, user access management, vendor risk management, data security and data leak prevention strategy, business continuity and disaster recovery rigour and drill, etc."

The Kotak Mahindra Bank has been directed "to cease and desist", with immediate effect, from onboarding of new customers through its online and mobile banking channels and issuing fresh credit cards. "The bank shall, however, continue to provide services to its existing customers, including its credit card customers," RBI said.

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, the RBI added. "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," the RBI said.

In the absence of a robust IT infrastructure and IT Risk Management framework, the RBI said the bank's Core Banking System (CBS) and its online and digital banking channels have suffered frequent and significant outages in the last two years, the recent one being a service disruption on April 15, 2024, resulting in serious customer inconveniences. "The bank is found to be materially deficient in building necessary operational resilience on account of its failure to build IT systems and controls commensurate with its growth," the central bank said.

The RBI further said that in the past two years, it has been in continuous high-level engagement with the bank on all these concerns with a view to strengthening its IT resilience, but the outcomes have been far from satisfactory. It is also observed that, of late, there has been rapid growth in the volume of the bank's digital transactions, including transactions pertaining to credit cards, which is building further load on the IT systems, the Reserve Bank said.

"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 statement said.

Kotak Mahindra Bank in a statement said: "We have received an order from the RBI which directs us to temporarily pause onboarding of new customers though our online and mobile banking channels and issuance of fresh credit cards. The Bank has taken measures for adoption of new technologies to strengthen its IT systems and will continue to work with RBI to swiftly resolve balance issues at the earliest." The bank also reassured its 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," Kotak Mahindra Bank said.

According to the RBI, the restrictions 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, the central bank said. Kotak Mahindra Bank Limited is scheduled to announce the consolidated and standalone audited financial results for the March 2024 quarter and financial year 2023-24 on 4 May.