The regulatory action by RBI on April 24, preventing Kotak Mahindra Bank from onboarding new customers online or issuing new credit cards, may set back credit growth and profitability, according to S&P Global Ratings.
Credit cards are a higher-yielding target growth segment for Kotak Bank, with the portfolio growing 52% on year as of Dec 2023. In comparison, total loan growth was at 19%
Action by RBI this week could push the bank to rely more on physical branch network expansion to supplement growth thus entailing higher operating costs, the global agency said in a note.
The order will, however, not materially affect Kotak Banks ratings (BBB-/Stable/A-3) as credit cards make up a small (4 percent of total loans) portion of the portfolio as of December 2023, it said, adding that the bank will still be able to cross-sell its other products to existing customers.
We anticipate Kotak Mahindra Bank could potentially take a year to fully address the RBI’s key concerns for the bank which encompasses systems stability, patch management, and disaster recovery.
The regulatory sanctions followed several outages of the banks core banking systems as well as online and digital banking channels and deficiencies identified through the RBI’s IT examinations in 2022 and 2023.
In a similar case in 2020, when the RBI barred HDFC Bank from sourcing new credit card customers, the lender took more than a year to meet the RBI’s requirements and have the restrictions lifted.
In the past 18 months, Kotak Bank has made significant progress on technological enhancements, including the hiring of senior level executives in the chief technology officer and chief experience officer positions. Nevertheless, it will take time for the bank to implement changes and conduct a comprehensive external audit to address the RBI’s concerns, S&P Global said.
The actions also reflect the regulators commitment to strengthening the financial sector and its diminishing tolerance for operational deficiencies, it said, adding that systems stability and robust disaster recovery planning have become increasingly important with the rapid scale up in digital transactions in India.
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