(Bloomberg) -- Kotak Mahindra Bank Ltd., India’s fourth-largest lender by market value, has been barred from adding new customers through its digital channels and from issuing fresh credit cards after the regulator flagged governance and risk issues about its technology systems. 

The Reserve Bank of India found deficiencies and non-compliance in various processes over two years — from a lack of data security and leak prevention strategies to vendor risk management  — according to a statement. The RBI said it had engaged with the bank but “the outcomes have been far from satisfactory.”

It added that Kotak will continue to provide services to all its existing customers.

In a late evening statement, Kotak said, “The Bank has taken measures for adoption of new technologies to strengthen its IT systems and will continue to work with RBI to swiftly resolve balance issues at the earliest.”

India’s digital payments are expected to rise to 600 trillion rupees in the next five years, but lenders’ ambitions to capture more market share are often let down by technical glitches which attract the regulator’s ire. HDFC Bank, the nation’s most valuable bank faced similar challenges and was ordered to curb some of its digital and credit card operations following a series of digital outages in 2020.

Kotak Restores Services After Outages Hit Digital Transactions

Almost 98% of the transaction volume in Kotak’s savings accounts were by digital or non-branch methods, according to its most recent investor presentation for the quarter ended Dec. 31. 

“The ban on online customer acquisition will have an impact on Kotak Mahindra bank’s growth as it is one slowest lenders for physical branch expansions,” said Ashutosh Mishra, banking analyst at Ashika Securities. “The RBI ruling will create a negative sentiment on the bank.”

--With assistance from Saikat Das.

(Updates with Kotak statement in fourth paragraph.)

©2024 Bloomberg L.P.