Beyond the Knuckles: What Kotak Mahindra's Restriction Means for Banking Sector

In the contemporary era of modern banking, technological innovation has become synonymous with progress. However, RBI recent regulatory actions against Kotak Mahindra Bank have highlighted the complex relationship between innovation and regulatory compliance. This has raised questions about digital banking advancement. The story started long back when a new customer, Piyush opened an account with Kotak and deposited 10,000. However, the amount wasn’t reflected in his account. Bank remained silent when customer contacted them seeking resolution. Then, Piyush took the matter into his own hands. He posted about the event on twitter and it gained traction. Sensing the gravity of the situation, Bank agreed to refund the amount. This is not the only case. Several cases of online services lag and increased downtime has been noticed by RBI and users in last 2 years. Similar thing happened on 15th April, 2024, where users were unable to use the bank’s mobile application for the entire day. Despite several warnings, Kotak Mahindra Bank didn’t take any action. Lastly, RBI restricted its online and credit card activities because of its poor IT infrastructure.  Following frequent outages and deficiencies found during RBI's IT examinations, these limitations demonstrate the importance of strong technological frameworks in online banking. 

Kotak Mahindra Bank is ranked among top private sector banks in India. It has a consumer base of over five crore customers, with more than two thousand branches, three thousand ATMs, and over one lakh employees. The 811 app provide a comprehensive platform for all its online banking services. It accounts for 81 percent of total services by volume, making it the backbone of KMB’s revenue. The ban by RBI will impact it in following ways. Firstly, the credit card business used to contribute to 22-23 percent of the total revenue with staggering 53% growth. It was the most profitable sector for the bank. It used to generate money from the issuance fee, interest amount earned, merchant fee and, marketing tie-up. This sector is no longer operational following 24th April. 

Secondly, the bank can’t onboard new customers online, which was the second most profitable sector for the bank. 95% of the total personal loans, 90% of new investment account, 79% of total business loans by volume and newest segment of consumer durable loan, with 33% growth was via online mode. It was ceased to exist immediately. Apart from the mentioned reasons, it has affected the public trust and expectation. It will take quarters to recover from such a tragic incident and maintain the image of the bank. 

Paytm and Mobi Kwik saw an opportunity to garb the Indian online banking segment, while Kotak was lagging behind initially. So, it launched the 811 App in 2017, named after the date Prime Minister Narendra Modi had announced demonetization in the previous year (8 November), which according to Uday Kotak was "the day that changed India." It was widely successful during pandemic. It provided KYC video approval, creating new account, issuance of credit card and also providing bank insurance. Kotak was a big hit during pandemic. 

But there were some red flags depicted from beginning. On an average top bank spend around 9 to 10 percent of their cost on IT infrastructure. Axis Bank around 9.3%, ICICI bank around 10%, and YES Bank around 17%, while Kotak Mahindra Bank Spends only 3-4%. This is abysmally low considering the online services accounts a significant percentage of its total revenue. Also, RBI highlighted the risks of poor technological infrastructure and governance. These include IT inventory, data security, and business continuity planning errors.

What is the way forward for Kotak? Kotak need to strengthen its IT infrastructure, which would cost 700 crore per year. The Cost to Income Ratio for Bank is generally lower. Kotak’s Cost to Income was already 49% which is already higher than Indian Bank’s average of 47%. The cost will further increase and it can cause short or medium-run cash crisis for the bank. By applying Porter’s Five Forces, we can clearly analyze, it will have a long-run impact on its customer base and reputation. Indian Banking Sector depicts high competition and rivalry, superior say of technology providers and regulatory bodies like RBI, low switching cost and wide range of options available to customers. The ban will weaken its position in the market. The longer the ban, the larger the impact. It typically takes a year to lift the bank. The rivals like Indus Bank, Bank of Baroda, with slightly less market share than Kotak but higher growth rate will be most benefitted from this.

There are several lessons the banking sector can learn from Kotak. Most importantly to prioritize Tech Infrastructure. Kotak critically underscores here. Adequate resource allocation, maintaining and upgrading frameworks to ensure compliance with RBI’s requirements and guidelines. KMB's regulatory scrutiny shows the growing importance of cybersecurity and data protection in digital banking. Banks must strengthen their security to prevent cyberattacks and data breaches as they use more digital channels.

Kotak despite getting multiple warnings from the regulatory bodies from the last two years, chose to ignore it until the ban. Banks need to proactively engage with authorities, conduct regular external or third-party audits and immediately address the discrepancies to avoid sanctions and reputational damage. 

Major Financial news like a ban on a leading bank like Kotak, often triggers quite strong reactions from general public and stakeholder. Such a case is especially true for Indian Market. It can rapidly shift perceptions. Self-efficacy and expectation theory plays an important role in managing long-run image during a crisis situation. It can undermine trust, leading to skepticism about the service quality and reliability. Banks should balance creativity and financial system reliability and safety. Alongside innovation and customer experience, customer well-being and banking ecosystem integrity are crucial for long-term survival.

Financial Year 2023 was the most successful year for Indian Bank. Indian Banking depicts highest growth while world leading banks were trapped in worldwide crisis. The stringent measures by RBI like Implementation of Basel III frameworks, double layer protection, Indian Bankruptcy code 2016, Mergers of weak Public Sector banks from 27 banks in 2017 to 12 banks in 2023. It is making the system more robust via IT inventory management, user access, vendor risk, data security management, data leak prevention strategy and, Business continuity and disaster recovery rigor. KMB's experience may transform the banking sector despite regulatory restrictions. The incident may spur technology and governance investments as banks rethink innovation and compliance. This could boost banking sector resilience and competitiveness.