Kotak Mahindra Bank Spent A Lot On IT, But It May Not Have Spent It Right—NDTV Profit Exclusive

Kotak Mahindra Bank is aiming to build a "gold standard" for its tech infrastructure, Chief Executive Officer and Managing Director Ashok Vaswani had told reporters on May 4."We have a big landscape; we have many products and many kinds of businesses. Therefore, you have to spend across those businesses. It is a question of what kind of standard you want to get to, both in terms of capacity and resilience. We are going to achieve, more or less, what I like to call the gold standard. A very high level of resilience and huge capacity," he had said..In the year ended March 2024, the bank has already spent between Rs 1,600 crore and Rs 1,700 crore on upgrading its tech infrastructure, or about 10% of its operating expenses. This was higher than the Rs 1,200–1,400 crore it spent the year before. Going ahead, the bank would continue to reprioritise its spending towards rising IT costs, the bank's senior management told reporters.At around 10% of operating expenses, Kotak Mahindra Bank spends more than its peers on technology. So why, then, has it not been able to meet the Reserve Bank of India's standards on IT resilience?On April 24, the banking regulator introduced strictures against the bank, saying it could not onboard new customers through its digital channels and could not issue fresh credit cards. The strictures followed what the RBI describes as follows:"...significant concerns arising out of Reserve Bank’s IT Examination of the bank for the years 2022 and 2023 and the continued failure on part of the bank to address these concerns in a comprehensive and timely manner."While spending has been strong, Kotak Mahindra Bank missed the mark when it came to appropriate budgeting of this spending, three people with knowledge of the matter told NDTV Profit.The Journal of the Indian Institute of Banking and Finance's most recent data shows that banks spent $8.6 billion on IT in 2020, with an expected increase to $11.3 billion by 2023..The key problem at the bank was a lack of prioritising solutions to technical loopholes, especially in legacy infrastructure, two of the three people mentioned above said on the condition of anonymity..At Kotak Mahindra Bank, a typical annual IT budget could look like this:Employee cost: 20% (in-house talent + outsourced)Run the bank cost: 30-35% (dedicated to the core banking system, existing systems, contracts, and L1 and L2 support licenses)Infrastructure cost: 15-20% (includes data centres, cloud, firewall, etc.)Change the bank cost: by 25–30% (dedicated to new projects like apps, data analytics, new portals, etc.)The people cost is where things went awry for Kotak Mahindra Bank, spending did not match the ambition for the lender, the people quoted above said.Despite a huge workforce, the tech team would only have about 1,200–1,500 people, according to the second person quoted above. Most of the skilled tech talent needed to handle disaster recovery or monitoring came from middle management, where attrition was high, the person added.The employee turnover rate in middle management stood at 20% for male employees, compared to 18.5% in FY22 and 9.6% in FY21, according to the FY23 annual report. In contrast, the turnover rate for female employees was 19.6% in FY23, 17.6% in FY22, and 11.3% in FY21.In addition to the people problem, the bank's core infrastructure also had issues.The bank was using legacy systems, and a timely upgrade of them was missing, the first of the two people quoted above said. Therefore, the infrastructure lacked sufficient updates to manage the volume of digital transactions.In addition, disaster management drills were also a problem. Typically, these drills include running all the bank's systems from a secondary or disaster recovery site in order to test the strength of the system.Not only did the bank conduct insufficient drills, it also lacked the right people needed to constantly monitor the system, the person quoted above said..According to the RBI's strictures, Kotak Mahindra Bank will need to appoint a third-party auditor to conduct a thorough check of its IT systems. Once the auditor has submitted the report, the regulator will review the restrictions it has placed.The audit will need to be supported by remediation of all deficiencies by the regulator and the external auditor, to the satisfaction of the RBI.In his comments, Vaswani had said that the financial impact of these restrictions may not be severe, but the reputational impact is worrying. The bank has estimated an impact of Rs 300–450 crore on its profit before tax in FY25."The management team and I are exceedingly clear that our first and top priority is to get Kotak back to business as usual. And while we are doing this and in this period, we are building everything that it takes to bring Kotak back to business as usual, getting ready to come back roaring when we get the permission to do so from our regulators," Vaswani had said.The issue here is governance and that the bank's board of directors did not have formal oversight despite RBI suggesting to banks to have an IT strategy committee in its April 2011 circular, according to Hemindra Hazari, a SEBI-registered, independent analyst."When smaller banks and even NBFCs had IT Strategy Committees prior to FY2023, why did the Kotak Bank board ignore setting up such an important committee in FY2022 and FY2023?," he said.The absence of an IT strategy committee meant that the board was totally dependent on the executive regarding IT, Hazari said.Even as the bank struggles with these regulatory issues, it is a baptism by fire for Vaswani, who took over as MD and CEO only in January. Founder, MD and CEO, Uday Kotak, stepped down in September 2023. How soon Vaswani is able to resolve these legacy issues and bring Kotak Mahindra Bank back on track will be something for the market to watch out for.

Kotak Mahindra Bank Spent A Lot On IT, But It May Not Have Spent It Right—NDTV Profit Exclusive

While spending has been strong, appropriate budgeting of this spending was where Kotak Mahindra Bank missed the bus.

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Kotak Mahindra Bank Spent A Lot On IT, But It May Not Have Spent It Right—NDTV Profit Exclusive

While spending has been strong, appropriate budgeting of this spending was where Kotak Mahindra Bank missed the bus.

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