‘Kotak Bank faces setback in credit card growth, profitability due to RBI action’
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 higheryielding target growth segment for Kotak Bank, with the portfolio growing 52 per cent on year as of December 2023. In comparison, total loan growth was at 19 per cent.
“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 aect Kotak Bank’s ratings (BBB-/ Stable/A-3) as credit cards make up a small (4 per cent 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.
REGULATORY CONCERN
“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,” said S&P Global
The regulatory sanctions followed several outages of the bank’s 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.
TECH PROGRESS
“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 o«cer and chief experience o«cer 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 regulator’s 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.
Even HDFC Bank has delivered six per cent returns in the last three years. With the Reserve Bank of India’s harsh action on Monday evening, by imposing a ban on onboarding customers digitally and issuing fresh credit cards, the question is whether Kotak Mahindra Bank can shed its underperformer tag any time soon.
For the first time in about a decade, Kotak Mahindra Bank stock witnessed the sharpest single day fall (down around 11 per cent).
There are two critical points to delve — first, the language used in the RBI circular and second, the timing of the ban.
HARSH BAN
Kotak Mahindra Bank isn’t the first instance of a bank being pulled up for deficiencies in the digital banking arena. There’s precedence with
ANALYSIS.