India's banking sector has been undergoing a significant digital transformation, led by Kotak Mahindra Bank and Punjab National Bank. This transition has not been without its challenges, with major oversight and procedural lapses coming to light, resulting in potential fraud risks.
Ashok Vaswani, a pioneer in digital banking, was appointed as the CEO of Kotak Mahindra Bank to accelerate its digital journey. According to InvestingPro, Kotak Mahindra Bank, also known as KTKM, has raised its dividend for three consecutive years, an encouraging sign for investors. However, the bank is quickly burning through cash and analysts anticipate a sales decline in the current year. Despite these challenges, KTKM's stock generally trades with low price volatility, which may be an attractive feature for risk-averse investors.
Meanwhile, Punjab National Bank launched PNB Metaverse, a virtual branch providing a 3D customer experience. Punjab National Bank, or PNBK, has seen accelerating revenue growth, according to InvestingPro. However, the bank suffers from weak gross profit margins and is quickly burning through cash. Despite these issues, PNBK has been a prominent player in the banking industry and has delivered a high return over the past year.
The sector has faced severe setbacks due to procedural lapses and oversights. The most notable of these is the 'Bob World' app scandal at the Bank of Baroda (BoB). Staff were found manipulating accounts and linking unrelated mobile numbers, artificially inflating digital user numbers. Unauthorized withdrawals from customer accounts using mobile banking were also reported, implicating business correspondents.
In response to these issues, the Reserve Bank of India (RBI) banned BoB from adding new customers to 'Bob World' until deficiencies are rectified. A similar ban was imposed on HDFC Bank due to glitches in their digital processes.
Despite these issues, as of March 2023, BoB maintained a significant digital footprint with 53 million app downloads and 30 million active users, according to Motilal Oswal Financial Services. Furthermore, in an effort to address the scandal, BoB introduced an Interoperable Cardless Cash Withdrawal (ICCW) facility for cash withdrawals without debit cards and suspended over 50 employees involved in the 'Bob World' incident.
The civil society platform, Bank Bachao Desh Bachao Manch, has called for closer scrutiny of banking apps and the implementation of an information security audit mechanism. The Maharashtra State Bank Employees Federation has expressed concerns about the aggressive digitization targets set by banks.
Following these incidents, the RBI is expected to implement a stricter scrutiny regime for banking apps. While these incidents have had a loss-making impact on the banks involved, there have been no immediate implications for asset quality. According to InvestingPro, PNBK's net income is expected to grow this year and the company is predicted to be profitable. For more insights, investors can check out InvestingPro Tips, which provides additional tips for a total of 13 for PNBK and 9 for KTKM.
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