RBI Bars Kotak Mahindra Bank: Will it be Able to Fix its Woes?

Kotak Mahindra Bank reported a 25% hike in net profit, touching the ₹5,302 crore mark for Q4 of FY24. Such a positive quarterly report should have been happy news, and it did if you take the 4.9% peak in share price into account. But, despite this, the NBFC-turned-bank would not be celebrating anytime soon.

Wondering why? Well, the Reserve Bank of India has placed a bar on the bank, stopping them from taking any new clients. The regulator also restricted Kotak Mahindra from issuing new credit cards for the non-fixed duration. RBI did this due to certain concerns that needed to be addressed as soon as possible.

The bad blood between RBI and Kotak Mahindra Bank is a well-known story in the banking sector. Now that RBI has finally barred the bank from taking on new customers (albeit temporarily), could this mean a checkmate from the regulator?

Continue with this article to learn what happened, what is happening, and what could happen with Kotak Mahindra Bank.

What Happened Between RBI and Kotak Mahindra Bank?

Reputed to be one of the top banks in India, Kotak Mahindra Bank faced a land-slipping-beneath-the-feet situation. Just think about it. RBI placing a bar on a bank from onboarding new customers is a big thing.
If you are confused, this means customers cannot open new accounts or initiate account-related activities digitally through mobile or online banking. But what happened that led to this restriction from the market regulator?

The Reserve Bank of India imposed restrictions due to "serious shortcomings" identified in the bank's IT infrastructure during inspections conducted over the past two fiscal years. These deficiencies resulted in frequent technical disruptions, including a major outage on 15 April 2024, raising concerns about customer service and potential systemic risks.

You must go through this article- How RBI’s policy changes will affect Kotak Mahindra Bank

Impact on the Bank

If you look at the pie chart below, you will see that banks and other lending entities contribute the most to Kotak Mahindra’s PAT. Now that the bank has been barred from onboarding new customers, this could negatively affect the financials.

Since banking and other lending entities contribute largely (around 85%) to the bank’s profitability, the restriction could lead to big problems. Here is a list of the different ways this restriction would impact Kotak Mahindra Bank:

a. Limited Customer Acquisition: The restrictions hinder the bank's ability to attract new customers through its most convenient channels, potentially impacting its growth.

b. Financial Impact: While the bank could be downplaying the financial impact, the restrictions could lead to lost business opportunities and reputational damage.

In just a month, the bank’s share price has considerably fallen despite the slight peak (above 4%) on the day of quarterly report release.

c. Investor Concerns: The restrictions temporarily dipped Kotak Mahindra Bank's stock price, reflecting investor concerns about the bank's IT vulnerabilities and potential operational challenges.

Looking at the troubles, one may wonder what was the bank's response to the restrictions placed on it by the RBI. This particular segment would be interesting to uphold since Kotak Mahindra Bank's Founder & Non-Executive Office, Uday Kotak, has something of a history with RBI.

Bank's Response to the Restriction

Before we get into the past, let’s see how the bank is planning on dealing with this hurdle and how it will soothe the investors. Yes, the announcement of a positive quarterly report did its job in flushing out any major fluctuations in the shares’ price, but this is not a long-lasting solution.

a. Redeployment of Resources:

Tackling the cause of the trouble from its roots, Kotak Mahindra Bank is committed to minimising the impact of the restrictions. They are redeploying resources to strengthen their IT infrastructure and address the identified deficiencies.

b. Collaboration with Regulators:

The bank emphasises its collaboration with RBI to enhance technology standards and improve IT resilience. However, this particular idea might not work too well, especially for onlookers who are aware of the bad blood between RBI and Kotak Mahindra Bank.

c. External Audit:

Kotak Mahindra Bank plans to commission a comprehensive external audit to identify and address all IT vulnerabilities as per RBI's requirements. This step is being taken to appease the regulator, hence leading to the removal of the customer onboarding restrictions.

But, whether these measures work their charm, only time will tell. Although looking at the history, nothing is impossible.

I know you must be annoyed by the use of “history,” “bad blood,” and similar repetitions throughout the article. Calm your horses, and let’s finally address what has happened over the years.

A Short Retelling of the Mess Between RBI and Kotak Mahindra Bank

It all started with RBI’s desire to tighten the noose around the banking sector in India and a promoter-CEO's wish to outsmart it. Kotak Mahindra Bank was established in 1985 as a Non-Banking Financial Service, aka NBFC. Then, by 2003, Kotak Mahindra Bank received a banking license from the government, transforming it into a banking entity.

A few years fast forward and RBI started nosing around in Kotak Mahindra’s business. First, it asked then CEO Uday Kotak to maintain a promoter holding at 49% (which was a minimum requirement at that time). Then, RBI sent multiple letters to the organisation asking to reduce the shareholding to 10-20%. This led to a long row on legal grounds as Uday Kotak took RBI to court.

After years of dispute, Kotal agreed to sell 56 million shares worth ₹6,913.75 crore bringing his holding to 21% meeting RBI’s demands. A lot more transpired between the two parties where Uday Kotak always found a loophole to evade RBI’s wishes. To say that the regulator might be holding some kind of a grudge wouldn’t be too far off.

Nonetheless, the riff-raff between Kotak Mahindra Bank and the Reserve Bank of India continues with a new chapter. From all this, I do not mean that RBI is slinging a blind shot or that Kotak Mahindra Bank might not be at fault. What comes out with the ongoing investigations will reveal the matter automatically.

Till then, the financials of the bank and its presence in the stock market could be marginally affected.

Kotak Mahindra Bank’s Financials

Amidst all the IT issues and regulatory restrictions, Kotak Mahindra Bank didn't fail to draw attention with promising financials. With a 22% rise in customer assets for March 2024 to ₹479,169 crore from ₹3,93,882 crore in March 2023, the bank's book value also increased from ₹563 to ₹653 this year.

If you look at the March-end quarter's reports, the bank showed a 17% hike in Profit After Tax (PAT) to ₹5,337 crore. ⬇️

CASA ratio took a dive from 52.8% to 45.5% for FY24 which could be a source of concern as CASA is the cheapest source of funds for banks.

The Bottom Line

When you look at the long-running war between one of the banks and THE Bank in India, a feeling of awe and inspiration zaps through one’s body—at least it did through mine. Uday Kotak has been raging a fight against the misuse of power that RBI has been adamant about performing.

This is a good lesson for both the parties, ones holding the power and ones under it. Now, what fate would Kotak Mahindra Bank face with RBI powering through its shortcomings is yet to be seen.

Nonetheless, this story would be a good example of how the banking sector should be more cautious.

Also Read- RBI Sandbox: A Financial Laboratory

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