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Public confidence needs to be maintained, says RBI on curbing HDFC Bank’s digital expansion

RBI restricted HDFC Bank from launching new digital banking activities and issuing credit cards. Governor Das says IWG proposal on corporates in banking independent of RBI.

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Mumbai: Commenting on the latest decision on HDFC Bank, Reserve Bank of India (RBI)’s Governor Shaktikanta Das said public confidence in digital banking needs to be maintained.

The central bank Wednesday imposed restrictions on HDFC Bank’s plans for expanding its digital services in view of the recent outages the company faced in its mobile and internet banking systems.

The bank, the second largest lender of the country, has also been restricted from issuing credit cards to new customers. At 14.97 million, HDFC Bank is the market leader in terms of number of credit cards issued.

“You see, we cannot put thousands or lakhs of customers who are using digital banking into any kind of difficulty for hours. Especially when we are ourselves giving so much emphasis on digital banking. The public confidence in digital banking has to be maintained,” Das said Friday in a media interaction.

He also addressed the internal working group’s (IWG) recent proposal to grant bank licenses to corporate houses, and added that the central bank will make a ‘considered decision’ after hearing from all stakeholders.

Also read: Why RBI has restricted HDFC bank from launching new digital facilities, issuing credit cards

‘Decision taken trusting HDFC Bank will fix issue’

Das said HDFC Bank has an overwhelming presence in the digital payments segment and the regulator has some concerns as there were a few instances of outages.

“We have some concerns on certain deficiencies etc. Therefore we felt it is required… it is necessary that HDFC Bank strengthens its IT systems before expanding further. Therefore, business restrictions have been imposed on them. I am sure HDFC Bank will comply with whatever we have said. In that background, this decision was taken,” he added.

HDFC Bank had two major outages in December 2018 and another in December 2019. Then, on 21 November 2020, another outage occurred in the bank’s internet banking and payment system due to a power failure in the primary data centre.

Das said RBI is “quite optimistic” that HDFC Bank management will take necessary action to address these issues.

In a statement issued Thursday, HDFC bank’s managing director and chief executive officer, Sashi Jagdishan, apologised to customers and said they were working to get ahead of the issue.

“We will work with the experts and the regulator to fortify the identified areas for improvement. Internally, we are looking at this as an opportunity to further improve ourselves and emerge stronger,” he said.

However, HDFC Bank isn’t the only bank facing such issues. State Bank of India (SBI), the country’s largest lender, also reported outages Thursday on its mobile banking platform ‘Yono’. SBI said they are taking steps to restore services.

Das said RBI teams are studying the SBI incident and it was early to comment on the issue. Nevertheless, he emphasised on the need for banks and other financial sector players to scale up investment in IT infrastructure as the entire financial sector landscape is going to be IT driven.

“If you want to remain competitive in the coming years, technology….IT systems, robustness is the key. So banks, NBFCs (Non-Banking Financial Company), other financial entities, need to invest more in their IT systems…technology and need to strengthen their systems so that public confidence is maintained and this is something I think going forward … that the entire financial landscape is going to become more IT driven. So there is a need for more financial investment,” he said.

While RBI typically imposes a monetary penalty on banks for failing to comply with regulatory norms, there are only a few instances when it has actually blocked business expansion. When asked whether such punitive actions are going to be the norm going forward, Das said, “The decisions, I mean whether it is a monetary penalty or it is a supervisory action, that depends on case to case.”

Also read: HDFC’s continuing digital glitch keeps customers locked out, and even some business

‘IWG proposal on bank licenses independent of RBI’

On the internal working group (IWG)’s proposal to grant banking licenses to industrial houses, the governor distanced the RBI from it saying it was not the banking regulator’s decision and it had not taken any decision on the issue so far.

“Let me say very clearly that it is a report of the internal working group of RBI. It should not be seen as RBI’s point of view or decision. That has to be very clearly understood,” he said.

The proposal to grant bank licenses to the large business houses had evoked a sharp response. Former RBI governor Raghuram Rajan and former deputy governor Viral Acharya called the move a “bad idea” in a joint paper. Concerns were raised on the grounds that connected lending – that the bank promoted by business houses will end up lending to entities of the same group – was something not permitted by RBI.

“The internal working group has two external members – who are also members of the RBI central board. The internal working group has acted independently and has independent deliberations. And they have given a certain point of view. RBI has not taken any decision on these issues so far,” Das said.

Das said a “considered decision” on the issue will be taken after receiving feedback.

“Our approach is consultative. The report of the IWG is now in the public domain. We will receive comments. After getting comments from various stakeholders and others who wish to give their comments to us, we will examine the whole matter and take a considered decision. That is how it stands,” he added.

Also read: RBI & Modi govt mustn’t let corporates into banking sector without improving supervision


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