Why Despite Significant IT Spends, Banks Struggle With RBI Compliance?

The banking regulator, Reserve Bank of India (RBI) has been keeping a close look on the public sector banks (PSBs) as well as private sector banks (PVBs) for a set of Information Technology (IT) compliance norms mandated by RBI in its regulatory guidelines.

The RBI is going at banks hammer and tongs for non-compliance with IT guidelines. Some of the previous instances are, (1) the termination of nodal account of One97 communications barring Paytm Payments Bank (PPBL) from onboarding new customers, (2) ceasing Kotak Mahindra Bank from onboarding new customers through its online and mobile banking channels and issuing fresh credit cards, (3) suspension of onboarding of customers onto the ‘bob World’ mobile application, the order which now stands dissolved.

The RBI states that these actions have been in the interest of customers and to prevent any possible prolonged outage which may seriously impact not only the bank’s ability to render efficient customer service but also the financial ecosystem of digital banking and payment systems.

Following these actions it is observed that RBI is not only a ‘lender of last resort’ but also a ‘primary saviour of public funds’. While talking to the media, the top management of multiple PSBs and PVBs disclosed that the banks are making significant investment in IT infrastructure and complying with the RBI norms.

“Since we are investing in information technology (IT), naturally an increase in IT expenses is slowly leading to the increase in the operating expenses,” said K. Satyanarayana Raju, managing director (MD) and chief executive officer (CEO) of Canara Bank.

The statements made by the MD and CEO of Canara Bank surely depict the seriousness that the banks have towards developing a robust IT ecosystem.

“Banks and financial institutions have been making significant investments in their IT infrastructure to manage their day-to-day operations but unfortunately compliances are dependent upon a lot of parameters. Despite the right compliance culture and tone at the top, the company struggles to adhere to the statutory requirements mainly on account of volume and complexity of the compliance requirements,” said Sandeep Agrawal, Director and cofounder, of Teamlease RegTech.

Raju while stating the reason for the increase in operational expense in the bank’s balance sheet said there is a one-time expenditure related to IT around Rs 150 to 200 crores, that will be absorbed this time only.

According to the analyst presentation, the operating expenses of the Bank of Baroda have also increased by 15.2 per cent from Rs 24,518 crore in the financial year 2022-23 (FY23) to Rs 28,252 crore in this financial year FY24.

It is worth mentioning that the bipartite wage settlement which happened in the previous quarter is also one of the reasons for the increase in the operational expense.

The total interest expense of the Bank of Baroda has increased by 40.7 per cent from Rs 48,233 crore in FY23 to Rs 67,884 crore in FY24 on a year-on-year (YoY) basis, but the analyst presentation does not mention the exact figures for IT spending.

Without mentioning the exact figures, Debadatta Chand, MD and CEO of Bank of Baroda stated, “Bank of Baroda is investing a thousand of crores now on IT. And, again we need to invest much higher than what we are making to make the system more robust.”

Highlighting the impact of the ban on onboarding new customers, Chand said, “The main impact was on the transaction through the BoB world app, which has seen a 10 per cent drop.”

The MD and CEO of BoB also said the bank is augmenting its human resources. While highlighting the importance of human resource for better compliance, Robin Bhowmik, Chief Business Officer, Manipal Academy of BFSI said, “For us to be able to have a team that will efficiently handle and apply technology, we need to strengthen skills. Banks should focus on in-house experts for these positions instead of outsourcing them to get results.”

Mentioning the relevance of continuous skill development Bhowmik added that there should always be ongoing compliance and training programs within any organisation so that employees get familiarised with updates in the industry.

“With the right mix of competence, knowledge, and awareness we can bridge the gap between IT investments and achieving robust conformity within the sector,” emphasised Bhowmik.

Along similar lines with BoB, the operating expenditure of Kotak Mahindra Bank was Rs 45,870.82 crore in FY24 which is an increase of 36.3 per cent when the operating expenses stood at Rs 33,645.04 crore in FY23, according to the exchange filing.

The RBI on 24 April 2024, has ceased and desisted Kotak Mahindra Bank from onboarding new customers through its online and mobile banking channels and issuing fresh credit cards.

The bank was, however, allowed to provide services to its existing customers, including its credit card customers.
Ashok Vaswani, MD and CEO of Kotak Mahindra Bank has also pointed out while talking to the reporters that the ban has not impacted the fixed deposit of the bank, the only thing that has been impacted is the onboarding of customers and the users of 811 credit cards.

The interest expenditure of Kotak Mahindra Bank was Rs 22,567.24 crore in FY24, a 56.6 per cent increase from the previous year. The total expenditure of the bank was Rs 68,438.06 crore, a 42.4 per cent increase from the previous year.

“To stay relevant and competitive, banks must invest significantly in their IT sector. This includes upgrading infrastructure, developing robust digital platforms, enhancing cybersecurity measures, and integrating advanced technologies like artificial intelligence and blockchain. These investments enable banks to offer a wide range of lifestyle services such as investment opportunities in mutual funds, insurance, equities and discounted ticketing for various events,” said Ramanan SV, CEO of Intellect Design Arena, India and South Asia.

Ramanan further added that embracing technology and offering comprehensive lifestyle services are crucial for banks to remain competitive in the dynamic banking industry.

“Initially, banks focused predominantly on digitalising customer-facing areas. However, there is now a shift towards upgrading and modernizing backend systems as well. Forward-thinking banks are now integrating regulatory considerations into their service offerings from the outset, rather than treating them as secondary concerns,” said Deepak Chand Thakur, CEO and Co-founder, NPST.

Thakur further added that this approach entails deploying RegTech systems for fraud and risk management, data management, data privacy, real-time reporting, reconciliation and settlement disputes, and compliance management.