Dear Reader,

Shares of Kotak Mahindra Bank fell about 11 per cent today after the Reserve Bank of India (RBI) barred the bank from onboarding new customers through its online platform and even issuing new credit cards.

The regulator’s decision was not a knee-jerk one. Rather, it was frustrated with the lack of effort from the bank to fix serious non-compliances in its digital operations. As explained by the RBI, the decision was taken after the bank failed to fix the concerns over its digital operations in a “comprehensive and timely manner”. This, in spite of several discussions held with the bank over the past two years.

At first glance, such regulatory sanctions appear harsh, given that these are only related to digital infrastructure. But then, lax information technology (IT) systems are a problem in the present form of banking that is highly digitalised and functions on a real-time basis for most transactions.

“The RBI crackdown through business sanctions, bans and restrictions has been relentless over the past three years,” says my colleague Aparna Iyer in this article.  Earlier in 2020, HDFC Bank was suspended from onboarding new credit card customers, due to periodic outages in its systems. And, the RBI also acted against financial institutions such as Paytm Payments Bank,  IIFL Finance and JM Financial Products for various reasons related to non-compliance.

More recently, RBI has repeatedly stressed the tardiness of banks in fixing problems. Monetary penalties imposed hardly moved the banks to act. So, RBI is now hitting banks where it hurts most -- growth. Note that HDFC Bank’s restrictions were lifted after nearly 8-9 months and reportedly led to loss of market share.

Should the regulator be so harsh and vocal about its actions? After all, it causes negative publicity and loss of credibility for the bank. Existing customers’ behaviour may also be influenced adversely and could impact overall revenue and profit growth in the near to medium term. This, in turn, can cause loss of market capitalisation for listed banks. Some analysts feel that this could also lead to a rise in cost of operations for banks.

At another level, it could lead to loss of trust in digital infrastructure of financial systems and banks and push customers back to traditional methods of banking.

However, this is a global practice and most regulators resort to penalties and fines in cases of transgressions. But even after billions of dollars are collected by way of fines, there are instances where banks have been penalised multiple times on a transgression. This perhaps underscores the need for harsh measures like RBI is taking -- a trade-off for greater security and safety of the financial ecosystem.


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(These are published every trading day before markets open and can be read on the app)

 

Vatsala Kamat
Moneycontrol Pro