Kotak Mahindra case: Indian banks caught between growth targets and an unforgiving regulator
Mumbai, Apr 25, 2024
Synopsis
Kotak Mahindra Bank is in the latest in the line of entities in financial services which has been pulled up for various lapses. Hints are that more could be penalised for dropping the ball - particularly if they had chosen to disregard warnings and red flags.
Kotak Mahindra Bank's tumultuous relationship with the Reserve Bank of India (RBI) - sometimes forcing the regulator to go on the back foot, with Mint Street appearing like a pale shadow of its past - or the group's generous subscription to electoral bonds, tend to colour any interpretation of the central bank's decision to proscribe the bank from acquiring new online customers and issuing credit cards.
But it's best to resist the temptation to link the two, even if there are good reasons to believe that Kotak's past decision to take on the regulator did not go down well with many in RBI, an institution that is not used to being defied.
Indeed, Kotak Mahindra Bank is in the latest in the line of entities in financial services which has been pulled up for various lapses. Hints are that more could be penalised for dropping the ball - particularly if they had chosen to disregard warnings and red flags. Also, Kotak isn't the first that faces a temporary ban on card issuance: in 2020 HDFC Bank, India's largest bank by market capitalisation, was slapped with a similar stricture.
In a growing, fiercely competitive retail banking market the punishment may seem harsh compared to Kotak's offence. However, the RBI's action reflects the extreme sensitivity, sometimes bordering on paranoia, among financial regulators. All the more when it's about gaps in a service provider's digital banking infrastructure or shoddy KYC compliance that paves the way for cyber theft and money laundering.
Online payments, mobile banking and card usage volumes have spiralled in recent years. An outage in a large bank can cause a disproportionate impact - halt urgent payments, stop remittances, and keep thousands of transactions in limbo. Such fiascos inevitably boil over onto social media, staining the reputation of the institution (which may have been cutting corners on system upgradation) and even making the regulator look powerless.
Little wonder that authorities today are as sensitive towards digital transactions as they were conscious about home loans 20 years ago, when, buoyed by low interest rates and banks' hunt for new business, home loans as a product took off in a big way.
Institutions which take longer to sense that substantial and recurring investments are needed on people, processes and technology would have to pay the price.
Kotak Bank is an interesting organisation: it has a new CEO, many old-timers and loyalists have a strong presence, and the founder continues to be on the board after stepping down as chief executive. But it's smart, nimble-footed, and a quick learner, even if occasionally cocky. Last September, the bank's chief technology officer told a newspaper, "...we now operate like a tech company". Probably it does.
But in a tightrope walk where one has to balance profitability, market share and stifling compliance, organisations, life can be a tad tougher when regulators become more and more unforgiving.
[The Economic Times]
