The Reserve Bank of India on Wednesday directed Kotak Mahindra Bank to cease and desist from onboarding new customers through its online and mobile banking channels and issuing fresh credit cards with immediate effect.

The bank, however, is allowed to provide services to its existing customers, including its credit card customers.

The banking regulator says these actions are necessitated based on significant concerns arising out of the IT examination of Kotak Mahindra Bank for 2022 and 2023 and the "continued failure" on part of the bank to address these concerns in a comprehensive and timely manner.

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 RBI explains.

For two consecutive years, the Kotak Mahindra Bank was assessed to be deficient in its IT Risk and Information Security Governance, contrary to requirements under regulatory guidelines.

“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 central bank points out.

In the absence of a robust IT infrastructure and IT Risk Management framework, Kotak Mahindra 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, as per the RBI.

The regulator says that Kotak Mahindra 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.

In the past two years, the Reserve Bank has been in continuous high-level engagement with Kotak Mahindra Bank on all these concerns with a view to strengthening its IT resilience, but the outcomes have been far from satisfactory, the RBI says.

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 regulator adds.

The Reserve Bank, therefore, has decided to place certain business restrictions on Kotak Mahindra 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 restrictions now being 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.

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