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Kotak Mahindra Bank Barred from Digital Expansion 

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India’s central bank has banned Kotak Mahindra Bank from issuing credit cards or taking on new digital and mobile banking customers. 

Image Source: Reuters
India’s central bank has banned Kotak Mahindra Bank from issuing credit cards or taking on new digital and mobile banking customers. 
Image Source: Reuters 

India’s central bank has taken stringent action against Kotak Mahindra Bank, prohibiting the institution from issuing credit cards and onboarding new digital and mobile banking customers. This move signals a significant escalation in regulatory enforcement within India’s consumer finance sector. 

The Reserve Bank of India (RBI) cited “serious deficiencies” in IT risk management and security governance at Kotak Mahindra, a prominent private sector lender founded by Uday Kotak, a key figure in India’s financial landscape.  

The RBI stated on Wednesday that it had chosen to enforce the restrictions despite “continuous high-level engagement with the bank on all these concerns”. 

“The outcomes have been far from satisfactory,” the RBI expressed in a statement. “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 ban, subject to review upon remediation of the identified issues, highlights the RBI’s shift towards more impactful measures compared to previous instances of fines. The regulatory body’s decision underscores concerns over the rapid growth in digital transactions handled by Kotak Mahindra, including credit card transactions, which strain the bank’s IT infrastructure. 

A spokesperson for Kotak Mahindra assured existing customers of uninterrupted services while affirming the bank’s commitment to swiftly resolve the identified issues in collaboration with the RBI. 

This regulatory action is part of the RBI’s broader efforts to mitigate risks associated with India’s burgeoning retail lending sector, where unsecured lending constitutes a significant portion of total banking sector loans. Recent warnings from RBI Governor Shaktikanta Das urging banks to exercise caution reflect growing concerns over rising consumer debt and delinquencies. 

Kotak Mahindra’s digital banking service, 881, which constitutes a substantial portion of its personal loan portfolio, experienced outages earlier this month, impacting digital transactions and cash withdrawals for customers. Notably, this development follows previous regulatory disputes between Uday Kotak and the RBI regarding the ownership structure of the bank.  

These regulatory actions mark a departure from past practices of imposing nominal financial penalties for breaches, as highlighted by S&P Global Ratings. The recent suspension on Kotak Mahindra mirrors similar measures taken against other financial institutions like Paytm and HDFC Bank, indicating a broader trend towards stricter regulatory oversight in India’s banking sector. 

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