Kotak Bank’s stumbles show pitfalls of ambitions
Minister wants financial institutions to modernise tech
MUMBAI: Prime Minister Narendra Modi wants to export India’s digital payments system to the world.
That plan now risks stumbling as clunky technology used by Indian lenders fails to keep up with his ambitions.
In recent years, the fastest-growing major economy has invested in a vast ecosystem of technologies to increase financial inclusion and pull hundreds of millions of Indians into the digital marketplace.
Today, the nation’s homegrown payments system, United Payments Interface, or UPI, is used to pay for practically everything, from expensive jewellery to a 10-rupee cup of piping hot tea.
Yet Indian lenders are still saddled with old technologies, burdening banks as they expand their digital offerings and handle a greater number of deposits. India’s government hasn’t minced words about its concerns.
Finance minister Nirmala Sitharaman has urged financial institutions to modernise and ensure that the domestic financial system “remains uncompromised.”
Last December, officials asked stateowned banks to shore up cybersecurity and strictly enforce the know-your-customer process when onboarding new businesses.
Lately, regulatory ire has focused on Kotak Mahindra Bank Ltd, one of India’s largest private lenders.
Earlier this month, system glitches disrupted cash withdrawals and digital transactions, prompting the Reserve Bank of India to bar Kotak from adding new customers through its digital channels and from issuing fresh credit cards.
State lender Union Bank of India Ltd’s customers recently aired similar grievances on social media, including an inability to use the bank’s app, netbanking or UPI for transactions for several hours.
In 2020, HDFC Bank Ltd was punished by the RBI after outages in its digital banking offerings.
“The central bank’s actions highlight that there’s a catch up on the regulatory front after an exponential growth in digital transactions
in the last few years,” said Pranav and policies to adequately protect Gundlapalle, senior analyst at Bernstein customer data and prevent data breaches, Research. according to a report by Mckinsey &
Glitches aren’t limited to financial transactions. Company. Shadow lender Mahindra & The back-end for most banks still relies on Mahindra Financial Services Ltd said last a “legacy system,” the report said. week it noticed a 1.5 billion rupees Tech resilience remains a challenge for (Us$18mil) fraud in its loan portfolio, which India’s banks, which spend nearly 50% less involved forgery of customer authentication than their global counterparts on technology documents for retail vehicle loans. as a percentage of net income.
Bank of Baroda, one of the largest staterun In many cases, business has taken priority banks in India, suspended dozens of over technology, resulting in a smaller
theinr dbudget executives last year and clawed back for its development, according to benefits as part of its probe into irregularities Vipin. in on-boarding to its mobile app. “That will change as banks get more serious
Banks outside India have also faced issues. about developing their processes to In Singapore, DBS Group Holdings Ltd was avoid regulator ire,” he said. reprimanded by the central bank after the Modernising core and back-end systems lender experienced a series of digital banking can take years. Globally, banks have varied outages last year. their approaches depending on starting
Compensation was slashed for chief executive points and risk appetite. officer Piyush Gupta. Indian banks are also stymied by what
Vipin V, a partner at Boston Consulting they can pay compared to financial technology Group Inc, said the customer experience in and other technology-focused firms. India has broadly improved on the frontend, Some public sector banks have hired talent “but the core layer and its architecture on short-term contracts, but that doesn’t have not been modernised at the same resolve the long-term challenges of integrating pace.” the systems, according to market sources.
As India’s digital transactions rapidly “Changes are very expensive,” said Akhil climb – more than five-fold since 2017, Handa, who until recently was the chief according to government estimates – that’s technology officer at Bank of Baroda. created stress on back-end systems. “The systemic alignment is toward maintaining
Indian banks lack the necessary infrastructure the status quo.” — Bloomberg