By Siddhi Nayak and Jaspreet Kalra

MUMBAI (Reuters) - Indian banks' plan to increase their technology spending to around 10% of their operating expenses to keep up with the surge in digital transactions as the central bank intensifies scrutiny on frequent outages, more than half a dozen bankers said.

Banks were earlier spending between 6%-8% of total operating expenditure on technology, sharply below the global average of 10%-12%.

However, increased scrutiny of banks' IT systems by the Reserve Bank of India (RBI) over the past year and the recent sanctions imposed on Kotak Mahindra Bank due to technology-related deficiencies are forcing lenders to take the regulator's concerns more seriously.

The RBI has frequently directed banks to reduce tech-related glitches that disrupt customers' ability to transact, five bankers said, declining to be identified as they are not authorised to speak to the media.

As operating expenses have grown over the years, Kotak Mahindra Bank spent "significantly" more on technology, Ashok Vaswani, MD and CEO of Kotak Mahindra Bank, said in a post-earnings press conference.

However, "what is evident, is that our efforts have fallen short of what the regulator expects," Vaswani said.

India's banking and investment services firms were estimated to have spent $11.3 billion on technology in 2023, according to latest available data from Gartner.

"We believe in today's world, systems cannot be down and you have to create online, real-time systems to match the capabilities," said Sumant Kathpalia, CEO at private lender IndusInd Bank, which currently spends about 8%-10% of cost-to-income on IT-related expenses.

"We have invested and will continue to invest in these," he said.

The increased investment will go towards upgrading core systems which form the backbone of all banking operations, and on better monitoring of digital frauds, protecting customer data and tech-driven processes for customer verification, the bankers said.

Other private lenders like ICICI Bank, Axis Bank, Yes Bank, and Kotak Mahindra Bank, at post earnings events recently said they will increase IT spending to deal with rising digital activity, including transactions via India's home-grown payments system Unified Payments Interface.

More than 40% of all payments done in India are now digital but outages have become more frequent.

In discussions with lenders, RBI has noted that the banking system is not adequately prepared to handle the growth in digital banking transactions, one of these bankers said.

The RBI did not immediately respond to email queries.

"Most banks' core banking systems are quite dated now so they are now assessing whether the systems can handle the rise in digital activity," said Rohan Lakhiyar, partner at consultancy firm Grant Thornton Bharat's financial services risk division.

The other focus area, for both banks and the RBI, is cyber-security since each new technology integration that banks complete also raises an operational risk, Lakhiyar added.

"Banks' plans to increase their IT spends seem to be on the back of RBI's more stringent approach to tech issues and the need to upgrade backend systems as banks increasingly source customers digitally," Amit Khurana, head of equities at Dolat Capital said.

(Reporting by Siddhi Nayak and Jaspreet Kalra; Editing by Shri Navaratnam)