With rising IT expenses, Kotak Mahindra Bank also saw rising customers complaints

The rising expenditure on the information and technology (IT) and digital services of Kotak Mahindra Bank in the financial years (FY) 2022 and 2023, (the two years over which the Reserve Bank of India (RBI) expressed significant concerns in the bank’s IT management), was accompanied by a jump in customer complaints in the internet banking, mobile banking and e-banking segments, data from the bank’s annual reports and management commentary showed.

In the two years, the bank increased its expenditure on IT and digital services by an average of 43 percent.

According to the commentary from the bank management, the expenditure on IT stood at around 7-10 percent of the total expenditure in FY22 and FY23. For instance, in FY 22, the IT expenses of the bank stood around Rs 834 crore. “The operating tech cost as part of the overall tech cost is about 7.5 percent and that’s been consistent through this year. Both for the quarter and the year, and of course, if I add the CAPEX, it would be another one-third of that addition to that,” said Jaimin Bhatt, then Chief Financial Officer (CFO), Kotak Mahindra Bank.

“If I look at it, at the bank level, our total expenditure for FY24 is about Rs 16,780 crore which was up from Rs 13,800 crore in FY23. IT expenditure was around 9.7 to 10 percent of the total capital expenditure,” said Devang Gheewala, CFO, Kotak Mahindra Bank on May 4.

In addition, data in the annual reports of the bank showed that the complaints in the internet banking, mobile banking and e-banking segments rose from 50,670 in FY22 to 67,304 in FY23.

The jump in expenses and complaints came to the fore after RBI on April 24 barred Kotak Mahindra Bank from onboarding new customers on its online and mobile banking channels, and issuing fresh credit cards, citing deficiencies in its IT risk management. The actions followed an RBI examination of the bank's IT systems over the last two years and the bank’s continued failure to address concerns.

"These actions are necessitated 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," RBI said.

Combating IT issues

Post RBI’s hammer, the bank, in its investor presentation for the quarter ended March 31, 2024, announced proactive measures aimed at mitigating potential business impacts. The bank conveyed its intention to strategically redeploy resources to counteract the ramifications of the central bank's directives. "The bank is looking to redeploy resources to minimise the business impact and believes that these directions will not materially impact its overall business," the bank said in the investor presentation.

The bank estimates an impact of Rs 300-450 crore profit-before-tax (PBT) in FY25 following the regulatory action. And the management said that it will step-up investments to fortify its IT systems by focusing on sustainable compliance to baseline cyber security framework for banks and strengthening digital payment security controls. The bank will also hire an external auditor to assess the overall technology architecture soon, as mandated by the RBI.

Acknowledging the regulatory restrictions imposed by the RBI, Kotak Mahindra Bank conducted a thorough assessment of their potential repercussions. Specifically, the bank identified potential challenges affecting new credit card issuance and customer acquisition through its 811 platform. "Impact would be on franchise and customers, directly impacted businesses, primarily new credit cards and customer acquisition through 811, potential financial impact," the bank said.

Solving the issues around banks’s IT management is the number one priority for the bank, said Ashok Vaswani, Chief Executive Officer, Kotak Mahindra Bank. “This is the number one management priority for the bank and between Shanti (Shanti Ekambaram, whole time director), Devang and the management team, we are obviously spending much more time on the technology issues and we will continue to spend much time till we get this right,” Vaswani said in a post results press conference on May 4.

Digital business of the bank

The bank’s digital business is majorly sourced from Kotak811, its digital banking arm which is co-headed by Kotak Mahindra Bank’s founder Uday Kotak’s son Jay Kotak. It accounts for nearly 95 percent of personal loan disbursals, 99 percent of personal credit card sales and 79 percent of personal new business of the bank, latest data showed.

Additionally, a few days before RBI’s diktat on the bank, Moneycontrol exclusively reported that the bank is working to launch a revamped mobile application for Kotak811 and another application offering payment services.

And this came after the bank's technical servers experienced disruptions on April 16,  with several customers taking to social media to complain about issues with payments or transactions on the mobile app, ATMs and net banking.

According to Vaswani, on April 15, the bank was testing its disaster recovery process. “We were testing our disaster recovery process in the backend and this went wrong,” Vaswani said in a press conference on May 4.