The recent directive from the Reserve Bank of India (RBI) to Kotak Mahindra Bank to cease issuing new credit cards and onboarding new customers through its online and mobile banking channels is indeed a significant regulatory action.

The RBI, however, directed the bank to continue providing services to its existing customers, including its credit card customers.

"The Reserve Bank of India has today, in exercise of its powers under Section 35A of the Banking Regulation Act, 1949, directed Kotak Mahindra Bank Limited (hereinafter referred to as ‘the bank’) to cease and desist, with immediate effect, from (i) onboarding of new customers through its online and mobile banking channels and (ii) issuing fresh credit cards. The bank shall, however, continue to provide services to its existing customers, including its credit card customers," the RBI statement says.

Compliance and Risk Management Concerns: The RBI's decision to impose these restrictions on Kotak Mahindra Bank suggests that there are concerns regarding the bank's compliance with regulatory requirements and its risk management practices. These concerns could relate to issues such as governance, internal controls, or adherence to regulatory guidelines.

Regulatory Oversight: As the central bank of India, the RBI is responsible for regulating and supervising banks to ensure the stability and integrity of the banking system. Regulatory actions like this are part of the RBI's efforts to maintain a sound and healthy banking sector.

Impact on Kotak Mahindra Bank: Ceasing the issuance of new credit cards and onboarding new customers through digital channels could have significant implications for Kotak Mahindra Bank. It may affect the bank's ability to grow its customer base and expand its credit card business in the short term.

Continued Services for Existing Customers: It's important to note that the directive does not impact the bank's ability to provide services to its existing customers. Existing customers, including those with credit cards issued by Kotak Mahindra Bank, should continue to receive uninterrupted service.

Resolution and Compliance Measures: Kotak Mahindra Bank will likely need to work closely with the RBI to address the concerns raised and implement remedial measures to ensure compliance with regulatory requirements. Once the RBI is satisfied with the bank's compliance and risk management framework, the restrictions may be lifted.

Reason behind RBI stop Kotak Mahindra Bank from issuing new credit cards

The Reserve Bank of India (RBI) has taken decisive action against the bank following significant concerns arising from the central bank's IT examination for two consecutive years i.e. 2022 and 2023. The RBI has noted continued failures on the part of the bank to comprehensively and promptly address these concerns.

For two consecutive years, Kotak Mahindra Bank fell short in its IT Risk and Information Security Governance, contrary to regulatory requirements. Despite corrective action plans issued by the RBI for the years 2022 and 2023, subsequent assessments found the bank to be significantly non-compliant. The compliances submitted by the bank were deemed inadequate, incorrect, or unsustainable.
 

"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. 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," said RBI.

While no new customers can be onboarded by Kotak Mahindra Bank, the RBI action does not restrict the bank to offer services to its existing customers, including its credit card users.

Hence, if you are an existing Kotak Mahindra customer or credit card user, the services will not be impacted at all.

Overall, this regulatory action underscores the importance of effective governance and risk management practices in the banking sector and highlights the RBI's commitment to maintaining the stability and trustworthiness of India's financial system.