ON April 24, the Reserve Bank of India sent shockwaves through the banking industry when it directed Kotak Mahindra Bank Limited (KMBL) to cease with immediate effect from onboarding new customers through online and mobile banking channels and issuing fresh credit cards. In its news release the bank said it had “directed” Kotak Mahindra Bank from these activities “based on significant concerns arising out of the Reserve Bank’s IT Examination of the bank for the years 2022 and 2023 and the continued failure on the part of the bank to address these concerns in a comprehensive and timely manner.”
Those who are now expressing shock at the RBI’s tough action should realise that this is not the first. In fact, consistently over the past two years, it has been sending signals to banks that they better pull up their socks. Just look at some recent actions:
Previous actions
In December 2020, HDFC Bank was asked to stop all digital business-generating activities and sourcing of new credit card customers. The action came post repeated outages in data.
Last October 2023, the Bank of Baroda suspended onboarding customers onto the ‘BoB World’ mobile application due to supervisory concerns.
In January, Paytm Payments Bank (PPBL) was stopped from accepting fresh deposits and doing credit transactions.
In March this year, the RBI asked the Federal Bank and South Indian Bank to stop issuing new co-branded credit cards.
What the RBI has done over the past 18-24 months needs to have come much earlier. Where is the doubt that in the frantic rush to onboard customers, be it credit cards or unsecured loans or even bank accounts, even the big banks have been cutting corners and there is a real danger of data theft and poor security oversight. The problem with the RBI action, though, is that it has come down strongly against private sector banks, but there is little action against the public sector, excepting the one against BoB.
Overall, though, the RBI has been tough as Forbes India correctly points out: “Not many have been spared: The list includes the largest private sector lender HDFC Bank to large NBFC lenders Bajaj Finance, IIFL Finance, JM Financial, payments bank Paytm Payments Bank (PPBL) and credit card issuers Visa and Mastercard. At a broad level, the RBI has been concerned about nipping bad practices at the earliest instance – be it poor governance or risk management concerns; evergreening of loans, non-compliance, and supervisory concerns, and even gaps in the functioning of technology platforms.’’
Stressed NBFCs
The danger is while RBI is going in for the big fish and reining them in, there are a large number of NBFCs and microfinance companies that are stressed and need urgent regulatory action. For example, the same Forbes India piece pointed out the highly stressed nature of the microfinance business in Punjab, Haryana and the northern states and how any collapse would completely impact the overall financial health of the sector. More recently, the action that the central bank has taken on lending to infrastructure projects is laudable. What the RBI has done is proposed tougher new rules that will drive lending to such projects. At the core of the draft rules is that the banks will have to make a minimum of 5 pc provisioning during the construction phase.
Learning from the collapse of the Chinese real estate market and how it impacted their banking system, the RBI has sensibly moved to ensure that the Indian banking system does not suffer the same seismic tremors that it felt almost a decade back when close to a dozen banks, had 11 per cent of their advances going into a prompt corrective action framework. Many bankers have since gone to jail and many institutions wound up as a consequence of that reckless spree of lending. Governor Shaktikanta Das wants to ensure that there is no repetition of that nightmare.
