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00:00Welcome, we're talking about our Kotak Mahindra Bank today.
00:10The big story all through the day and yesterday, especially when the RBI has taken some very
00:16stringent action against one of India's largest private banks.
00:21The action will have impact, of course, on its revenues, etc.
00:25The big question really is, what does this tell us about the preparedness of Kotak Mahindra
00:30Bank and of our banking system to onboard customers digitally?
00:35Remember, that's where the issue seems to be.
00:38So what has the RBI done?
00:39Let's begin with that.
00:40The RBI issued cease and desist orders for Kotak Mahindra Bank to onboard new credit
00:46card customers.
00:47That means no more fresh credit cards will be issued by Kotak Mahindra Bank.
00:52But it's not just that.
00:53They also cannot get new customers online or through their banking apps.
01:00That means no app, no mobile, no digital onboarding of customers.
01:04Now why is that important?
01:06Because about 90% of all the new customers for Kotak Mahindra Bank, like a lot of the
01:10industry, do come online.
01:13The reason is why?
01:15The reason is because of IT issues.
01:19The RBI found serious deficiencies in the IT system of Kotak Mahindra Bank and has been
01:26dealing with them for two years.
01:28They failed their IT compliance test that RBI routinely has for all banks.
01:33They were asked to fix things.
01:34They could not.
01:35And hence, they had to come and take this action.
01:39Now before we get into the details of implications, etc., and also the NDTV Profit Exclusive,
01:43there are some big questions that I would like to pose.
01:47Should it take a large bank like Kotak Mahindra over three years to fix IT issues?
01:54The management says they will resolve the issues shortly.
01:58My clear question is why couldn't they do it so far?
02:01Why should a company with profits over 15,000 crores be deficient in IT systems?
02:07Were the right investments not being made?
02:10Was it not being given enough attention?
02:13And also, should the RBI have stepped in earlier?
02:16If customers were being onboarded in large numbers with what the RBI clearly thinks is
02:21a deficient IT system, in fact, that seems to be part of the problem.
02:25As more and more transactions happen digitally and online, the bank system was not able to
02:30handle the load.
02:32Should the RBI also clarify if there is a risk to customer data?
02:36Because in its communication, it talks about, among other things, concerns with data security.
02:42What does that really mean for customers?
02:44We're going to get into all of those details, but I want to go across first to my colleague
02:48Pragati, who's been tracking this story very, very closely.
02:51Pragati, it seems the April 15th outage, which was the latest in a series of outages as far
02:59as Kotak Mahindra Bank is concerned, was perhaps the last straw, and that really was the problem,
03:04isn't it?
03:05The whole system wouldn't work for customers.
03:07Right, Navanna.
03:08You're absolutely right.
03:09So April 15th was just one of the first or one of the latest instances, but sources told
03:14us that these instances were actually very, very common, and they were happening frequently
03:19over the last two or three years.
03:22And that was one of the reasons or concerns that the RBI had with the bank, apart from
03:27four others.
03:28But before we delve into that, I would like to inform our viewers, this latest NDTV Profit
03:33Exclusive, that because after the RBI imposed curbs on the bank, the bank's new CEO, that
03:39is Mr. Ashok Vaswani, has also sent an email to the employees, and that's the latest exclusive
03:45that we have for you.
03:47Sources told us, in fact, we also reviewed a copy of the email that Mr. Vaswani wrote
03:52to the employees, and he said that there is a need of a better IT infrastructure because
03:58there has been an explosive growth in the business via all these channels, and that
04:04is the reason they need a completely different level of tech infra.
04:08In fact, he has also acknowledged the efforts of all Cotech employees, but he has said that
04:14the bank will work closely in order to find solutions to the latest problem.
04:20Now let me take a step back now.
04:22This was the latest update that we had for you.
04:24Let me take a step back now and come to what is the core issue or what caused the entire
04:31mess at Cotech Mahindra Bank.
04:33In the morning as well, we brought this exclusive to our viewers that there were five main points
04:38or main issues that the RBI faced with Cotech Mahindra Bank.
04:42We have that on screen for our viewers.
04:45One is the scalability, the next is multiple outages, third is the detail of these outages,
04:52fourth is the inadequate tech infra, and fifth is an additional contributor to the issues
04:57that is the high volume UPI transactions.
05:00If we have to go in depth for all these points, one would be the scalability of the core banking
05:07system at the core of this issue.
05:10Now sources told us that while the IT audits or inspections were going on for last two
05:14to three years at Cotech Mahindra Bank, the scalability of the core banking issue or the
05:20inability of the core banking system to come to a scale level in order to handle the bulk
05:26of these transactions was at the core of this issue.
05:31This is important.
05:32Let's understand this point by point and in simple terms.
05:35When you say scalability, essentially the rate at which new customers are coming on
05:40versus what the system could handle was just a complete mismatch, isn't it?
05:46Yes.
05:47This is what sources made us understand in simple terms, that the system was not, at
05:52least in terms of size or efficiency, was not equipped enough.
05:56The customer onboarding or the number of transactions and the volume of transactions was much larger
06:01than what the system could actually handle.
06:04In fact, we have an instance also here on our screen as an example.
06:07Sources told us that about 30 to 40 hours of outages were being reported in a year.
06:12When you say outages, that means at that point the customer cannot access their account,
06:16apps, etc.
06:17Is that the impact of outages?
06:20Yes.
06:21In broader terms, yes, we can say that.
06:23That would be an umbrella way to put it because these outages, when we are saying 30 to 40
06:28hours of outages, these outages are a broad umbrella word.
06:30Why?
06:31It can include inadequate UPI transactions, transaction failure, inability to log into
06:36the mobile banking app and so on and so forth.
06:40You talked about the management's commentary.
06:43I'm just wondering if they're saying anything or explaining anything on why they couldn't
06:49fix it all of this time because that's really the question.
06:52It's a large bank.
06:54So what we have gathered so far is that they did have multiple action plans in place and
07:00they were submitting those reports to the RBI and there was a constant conversation
07:05happening between the regulator and the bank.
07:08In fact, sources also told us, it's a very interesting point, Vandana, that they said
07:12that they were on the verge of completing all the changes that they had planned to introduce
07:18but the clampdown happened right before that.
07:21So while we don't have the exact details of the timeline, but they did indicate that to
07:25us in various conversations.
07:26No, I mean, that's like saying, you know, I couldn't finish my exam paper before the
07:30invigilator took away the paper.
07:32I mean, the fact is that when the bell rings, the bell rings and the RBI has decided to
07:36clampdown.
07:37We'll come back to you for more, Pragati, but meanwhile, let's get our conversation
07:41going.
07:42We're joined now by Abhisar Diwanji of EY, India Financial Services leader.
07:45Abhisar, great to have you on the show and thank you so much for speaking with us today
07:50because we want to begin with understanding the magnitude of action that has been taken
07:54against Kotak Mahindra Bank.
07:56Remember, the RBI also acted against HDFC Bank in the past for IT issues.
08:02Is this action much more than HDFC Bank?
08:07No, well, there's no question of it being the larger, there is no evidence to actually
08:11prove that it's any larger or lesser than that.
08:15I think the larger issue here is that banks are going through a transformation where they
08:20are digitizing the whole banking process, especially the retail banking process.
08:26And as part of that process, I think procedures are changing quite significantly.
08:32Be it HDFC, be it Kotak, I think it's all the same, or be it even IIFM or JM, when we
08:38saw earlier in the NBFC space.
08:41So what's really happening is that there is a new way of getting more and more customers
08:46on boarded, more and more transactions being done digitally.
08:51Customers are being assessed, approached, and sanctioned or banked to it digitally now.
08:58And that has changed a whole lot of processes in every bank.
09:00And like in every change in process over a period of time, there will be lapses that
09:06will happen in the processes, which are a constructive way of moving towards best processes.
09:13The best way to look at this is to make sure that every entity which has been audited or
09:20governed, every entity which is not yet audited, but yet to be audited, as well as the regulator
09:26needs to take this as a constructive process of remediating the bad processes and making
09:33sure that we move in a continuous path towards making sure that digitization happens.
09:40It's happening everywhere in every industry.
09:42Banking has taken the lead.
09:43And because banking or financial services are a highly regulated industry, we are seeing
09:48more and more of regulator intervention.
09:50But apart from that, I don't see that as one being of a higher magnitude than the other
09:54at all.
09:56What I mean when I say higher magnitude, I mean in terms and context of the RBI's action,
10:03the action the RBI has taken against Kotak Mahindra Bank versus what it took versus HDFC
10:08Bank.
10:09Is this of a higher magnitude?
10:15That may be.
10:16But you know, there are existing customers who continue to be serviced, whether it is
10:19credit card customers or existing bank customers.
10:23Now, all it says is that take a pause in the process that you're doing, try and remediate
10:27that and then move ahead and do it.
10:29I think it's a constructive process where the regulator has to understand the bank and
10:34the bank has to understand the regulator and arrive at a mid-path which is called the remediation
10:38path, which is acceptable to both and move on.
10:41Now, the thing is, what is acceptable to both is a big issue, because normally the enterprise
10:46gets more aggressive in terms of moving towards a digital path.
10:50The regulator tends to be more conservative, but the path is somewhere in the middle.
10:54And that is what the remediation needs to be about.
10:57So it's, you know, it's made out that, oh, I can understand what happened to a PTM bank.
11:03We said stop operations.
11:04I think that would have been a drastic measure.
11:07But when you talk about saying suspend operations so that you can rationalize and get back on
11:11track after, you know, consensual recommendations are implemented, that's, I think, a fair regulatory
11:18process in terms of the learning between the regulator and the regulated.
11:24You know, the question though, Abhijit, is how was this taking two years?
11:31Why should it take two years?
11:33And those are some of the big questions that we've posed.
11:36How do we look at it?
11:37Does this mean that the bank was not taking it seriously when the RBI kept saying that
11:41this is not working out or this is deficient?
11:43Or did the RBI act harshly and decide to make an example of Kotak Mahindra Bank?
11:53So what happens here is that because these are all newer processes and digitization,
11:58you know, as is everything else, is a very, very discovered or discovery in the process
12:05of being discovered process.
12:07What's really happened as part of that is that the banks would normally have a particular
12:10point of view of what is sufficient for them.
12:13The regulator on his part will have a particular view of what is sufficient of them.
12:20Now what happens sometimes is that in a particular situation, the regulator as well as the bank
12:25may interpret the situation very differently.
12:28It could also be possible that in different situations, the regulator may be interpreting
12:31something differently for different banks.
12:34So ideally, because, you know, this standardization itself is an evolutionary process, it takes
12:40one has to give it that time to happen.
12:42To say, oh, I did not follow rules for two years is not the answer.
12:45The answer is that there was an interpretation which I had, there is an interpretation that
12:49you had.
12:50I tried to mend it by a particular way, which I thought would be sufficient for the regulator.
12:54The regulator possibly did not think it was sufficient.
12:57So it's going to be a dialogue process between the two of them to resolve it.
13:00And I think, frankly, this is like, you know, we are going towards a path where banks and
13:06financial institutions who have adopted digitization and are at an advanced stage of adopting
13:11are actually paving the way for a smoother highway for the others to come through.
13:15So there will be, you know, a lot of impediments in between, a lot of remediation to be done
13:20in between.
13:21And the process has to be taken constructively.
13:22That's all I would say.
13:23All right.
13:24Stay on with us, Abhisar.
13:25I'm also inviting Ashwin Parekh, Managing Partner of APAS to the show.
13:32We're speaking with Gurmeet Chadha of Complete Circles PMS today.
13:35Welcome to both of you.
13:36And thank you so much for joining us.
13:38As we try to dissect and understand really what the issues are over here, Gurmeet, let
13:44me begin with you.
13:46And a variety of views, especially in the market on how much this will impact Kotak
13:52Mahindra Bank.
13:53Obviously, sentimentally, it has, the stock has reacted negatively, etc.
13:57But the question is, what is it telling us about the ability of the bank to scale up
14:01the way it wants to?
14:03And why this extent of deficiency?
14:05This is a very core and basic kind of requirement.
14:09You know, it is surprising, Damana, and it's not restricted to Kotak alone.
14:16If you see HDFC, Axis, leading private banks, there are frequent outages.
14:22Most of the time, the servers are down, especially during month ends.
14:25And I'm actually surprised, you know, you know, HDFC does 70,000 crores of quarterly
14:30fat.
14:31Kotak does 3-3.5 thousand crores, ICICI says 10,000 crores of fat.
14:35So the IT spending has to, has to be covered.
14:38This is not something which is new.
14:40And if you see the observations, they are also highlighting the five points where they
14:45found, you know, the observations, one was inventory management, second was user access,
14:51then they pointed out to vendor management, and they also pointed out to data security.
14:57So there were five areas they were, and this is not the first bank, HDFC had a similar
15:01issue a couple of years back, took almost 18 months to fix it.
15:04So what this does is that in this new digital world, while the current impact looks limited,
15:09the growth gets impacted.
15:11So let's say out of the saving accounts they have been opening, 70% of them are being digitally
15:16opened, especially with the 8.1 scheme, personal loans, most of them are digitally disbursed,
15:21credit cards, 99% are digitally now originated and done.
15:26So, and there is a big impact on the liability side.
15:29We are just looking at cards being only 4%, it doesn't, it's not as simple as that.
15:33I think the message from RBI to all banks is very clear, this is not just quota, you
15:37know, I'm just putting all private banks, is that you have to, you know, increase the
15:42spending on digital infrastructure, make systems more robust.
15:45No, but my question is, Gurmeet, why, why not?
15:48It's not like these banks have no profitability or are doing very badly or are doing very
15:53poorly.
15:54They are extremely profitable enterprises.
15:57I don't understand why they wouldn't spend, it's definitely not a question of budget.
16:04Is it a lack of understanding to the extent to which they needed to comply?
16:09No, it's a combination of, you know, banks being slow to react and the explosive growth
16:15we are seeing digitally.
16:16I don't think so.
16:17The kind of, for example, look at UPI transactions, this is one of the other areas RBI has highlighted.
16:22Also, the growth has been very high, Kotak in particular, the growth has been more digital,
16:26unlike HDFC, which is, let's say, adding 800 branches a year, Kotak is more like 50
16:30to 80 branches a year.
16:31So, they've been relying more on digital.
16:32So, I think it's both the pace of the growth and the bank's ability to catch up with it.
16:37And India hasn't seen those fines, Tamannaah, I've worked with Citibank, there were billions
16:41of dollars of fine on, and Citi never had an issue till now, despite their leaving India.
16:47So, I think the banks now need to realize that the future is digital, and I think the
16:51message is loud and clear.
16:52And I agree with you, I am surprised, had it been a tier two bank, it's okay, but the
16:57likes of Kotak, which are, you know, which are marquee banks, very high on governance,
17:01great leadership, it does come in as a surprise.
17:04Ashwin Parikh, great to have you on the show.
17:08Just wanted your take on what the message is from RBI, what it's telling us about Kotak
17:12Mahindra Bank and how they will have to really pull up their socks very, very quickly.
17:17I mean, we've got that exclusive excerpt from the management on what they plan to do
17:23next.
17:24They say they will fix it.
17:25My question is, what is your takeaway when for over two years, this problem persists
17:30and you don't manage to do anything about it?
17:32So, see, let's look at, you know, the issue on hand.
17:37One, of course, is when you're dealing with, whether it's onboarding or whether you're
17:42really conducting the transactions, assisting the customers to conduct the transactions.
17:46You know, when you're doing it online, one thing becomes very particular.
17:51See, if you ever use, let's say, for example, any one of those platforms, payment platforms,
17:57you know, one bank, the debit bank will normally debit your account, and then the other bank
18:03has to really complete the transaction by accepting and putting it in the account of
18:07the payer.
18:09The trouble in case of online banking is that if you make the other leg of transaction wait,
18:15then the transaction does not get completed.
18:18Customers feel very frustrated.
18:20Sometimes you wait.
18:21Let's say on these platforms, whether you're making an online payment or whether you're
18:26making even a QR code or a UPI payment, for instance, you know, if you make the customer
18:32wait, it becomes very difficult.
18:34And then if you reject a transaction, in the sense of an account of technology outages,
18:38then it does become very complicated.
18:40So that was one part of the whole story.
18:42The second is, in this day and age, when we know that we have to handle a large number
18:49of transactions, online transactions, and they have to happen on a real-time basis,
18:54outages can cause a lot of trouble, not only to the customers, but also to the system.
19:00You know, and there are systemic issues that can arise, basically.
19:03So, I mean, I would certainly say that there are concepts.
19:08I mean, like, for example, peak transactions, and then you build your capacity.
19:12Your scalability is one of the issues we talked about.
19:15You build your capacity in keeping with that.
19:17You continuously monitor that your scalability is at least two to three times the peak transactions
19:23that you have in a day.
19:25And you have to make sure that each and every application that you have with your whole
19:29banking is well-aligned, basically.
19:31So, I would still believe that three years is a little bit of a time bomb.
19:36I mean, all the excuses about the fact that the number of transactions has gone up, or
19:42whatever, can be very valid if you had a situation like this for three, four months, and you
19:48start paying more attention to it.
19:50So, three years, or two years, or I think more than that.
19:54Yeah, yeah, exactly.
19:55I think there's a lot to be answered in terms of why, you know, Kotak has had this lapse
20:01and what the reason is.
20:02I just want to quickly take you through this timeline of all of the action that the RBI
20:07has taken in the recent past in the banking system.
20:11Kotak Mahindra Bank is one of the latest.
20:15It's not as if the RBI has not taken action previously.
20:18In December 2020, they asked HDFC Bank to stop all forthcoming digital business-generating
20:26activities.
20:27It took, remember, HDFC Bank over a year to fix this, and assessment is that it's going
20:32to take Kotak Mahindra Bank also upward of 12 months to fix the issues that the RBI sees.
20:38Remember, HDFC Bank was also asked to stop sourcing new credit card customers in December
20:432020.
20:44Through then and after then, you've seen action on a variety of financial institutions,
20:49whether it's Paytm, whether it's Bajaj Finance, and of course, the latest being Kotak Mahindra
20:55Bank.
20:56Gurmeet Chadha, I want to come to you on, you know, what is the message that the regulator
21:00is giving?
21:01And does that make investments in banks a bit of a risky proposition?
21:08Because you never know when this is going to come up.
21:12See, financials will always have a regulatory risk, especially in the digital age.
21:16I think the only answer to that is diversification.
21:19If this can happen to Kotak and HDFC, you know, no entity is safe from regulatory supervision.
21:25I believe the entire industry needs to take note of this, that this is a new era, the
21:30business has to be done differently.
21:32I think also it could lead to a bit of, you know, re-rating and de-rating in few counters.
21:38You know, you're assigned a 4-5 book value on, A, the growth you do and your pristine
21:43asset quality, which Kotak and in general HDFC have also been there.
21:47Now, if there's any ban on digital front, it will impact growth.
21:51I mean, we are being short-sighted if we are saying that the financial impact is limited
21:56now, but in terms of growth, if you're at 4 book value, you have to grow at 20-25% and
22:01digital was forming a large part of growth for most of the private banks.
22:05So, I think first is, you know, the price correction which happens and then there is
22:09a bit of a time correction and maybe a bit of de-rating because these issues take time
22:13to fix.
22:14I don't see issue getting fixed so easily.
22:16However, it could be the response.
22:17There is an external audit.
22:19So, I think the message is clear.
22:20There is no compromise on digital ecosystem.
22:23You have to spend more on data security and I think the entire industry probably needs
22:28to come up.
22:29I am actually a little surprised.
22:30I had a look at some of the IT budgets for a lot of the large banks and I must say that
22:35they are very short of what they should be.
22:37Wait, wait, wait.
22:38One minute.
22:39I am interested in that.
22:40So, what did you find?
22:41You went and looked at the IT budgets of these banks, Kudmit.
22:43Do you think they are not spending enough?
22:45Absolutely not.
22:46It's visible, Tamanna.
22:47You don't have to put numbers to it.
22:49You know, just go to any branch every week, see the number of times servers are down.
22:53Yeah.
22:55The year end, I mean from 28th, 29th April, March when you had a year end, so many outages.
23:01A couple of days back, a message from HDFC Bank that net banking is down.
23:05So, I think this has become normal.
23:06It's like, you know, the call drops and telephone.
23:08To be honest, I'm sorry I'm being a little harsh here.
23:10You know, I work with Citi.
23:12I've never seen this kind of, you know, net banking issues.
23:15For almost four years, I was with the bank.
23:17One off is fine.
23:18I think it's almost becoming a rule.
23:21So, I think the banks need to take cognizance of this, that regulator.
23:25And I think we haven't started fining yet.
23:27Look at US, the way they fine.
23:28I mean, look at the track record of Citi or Barclays and how much fines they have paid in the last five years.
23:33You get to understand how serious this is.
23:35So, fine.
23:37At least they have not been fined yet.
23:38But the fact is that this is also going to impact Kotak Maidu Bank quite a bit.
23:43In fact, I want Abhisar's view on this.
23:44Two ways of looking at this, Abhisar.
23:46Is the RBI giving out a message to others long overdue?
23:50Their action or, you know, is Kotak Mahindra Bank now giving the impression that they didn't really listen to the RBI for two years?
23:58Do you think the regulator is being too harsh?
24:03So, if I were to wear a regulator's hat, I think there is nothing excessive as long as I'm trying to be conservative.
24:10If I take a company's hat, I would say that one needs to innovate faster.
24:15In every situation, the company would be innovating much faster than you expect the regulator to innovate itself.
24:21So, there is a gap.
24:23Now, what I would do as a regulator is not say that this…
24:26I would not interpret this to be excessive.
24:28I would say that the regulator is concerned.
24:31There is skepticism at the regulator.
24:34And the skepticism is always justified because you are entering into a newer directory.
24:39And to stabilize that directory, there will be two steps forward, one step backward.
24:45And I think that is the constructive process in itself.
24:48What the banks have to do or the financial institutions have to do, as well as the regulator has to do, is to take it as a constructive process.
24:56And make sure that both sides are open to what they hear.
25:00And then arrive at a consensual remedial process.
25:04Because it's not that the banks are fully correct.
25:07It's not that the regulators are fully correct.
25:09And somewhere in between is a discovered process that can happen through dialogue.
25:13Because the regulator has a different level of comfort.
25:15The bank will obviously have a different…
25:17Okay, so that was a safe middle path kind of answer, Abhisar.
25:20But, you know, the fact is in this particular case, you've had quite a bit of skirmishes between Uday Kotak and the regulator on various issues.
25:29Just on the stance of the regulator, I want to ask Ashwin Parekh his view.
25:33There are two ways of looking at it, Mr. Parekh.
25:36One is, was the regulator too harsh?
25:38One was that, yes, at least in this case, the bank definitely deserved it.
25:42What would you say?
25:44So, let's look at it this way.
25:47I would certainly say that the regulator is not being harsh at all.
25:51And look at the other environments.
25:54Let's look at stockbroking, for example.
25:56You know, if you look at semi-regulations and if you look at the way, you know, both the bosses work.
26:04You know, I mean, each and every broker is expected to report technology glitches on a regular basis on their own to begin with.
26:12And if they find that there have been outages more than a certain period, then immediately, both, I mean, the bosses as well as SEBI, you know, they put penalties on the companies, on the brokers.
26:29Now, RBI does something similar.
26:32I mean, each and every bank is expected to report all the outages, all the technology glitches, as it is termed.
26:38And they're supposed to report to them.
26:41So, what has happened, perhaps, is that the outages which are quoted, let's say, in the communication may not just be there.
26:51I mean, it may be more than those outages.
26:53And if it took HTC Bank, let's say, about a year, as you suggested, let's not forget it was during COVID period.
27:01Now, I'm sure, very confident that HTC Bank will be able to do it much faster.
27:06Maybe they've already put some measures already because the communication that the COS put out does suggest that they may have put some action into this.
27:15But to my mind, if you say, was the regulator harsh? I don't think so.
27:20Yeah.
27:21I mean, the regulator has to worry about the system.
27:23If anything, they were allowed to continue onboarding customers even when it was apparent for two years that your basic systems were not ready or weak or the infrastructure was weak.
27:34And, I mean, it's no surprise to anyone that the quantum of digital transactions has blown up.
27:40We've seen that trend coming.
27:41So, a lesson here for Kotak Mahindra Bank.
27:43But I'm going to wrap up with what Gurmeet said.
27:45If HDFC and Kotak Mahindra Bank are found deficient by the regulator, then the others really pull up their socks.
27:52These are some of the top banks which have been in the regulator's crosshairs.
27:56That's all the time we have on this special show.
27:58But stay tuned.
27:59A lot more coming up on the other side on NDTV Profit.