RBI action on Kotak Mahindra Bank may restrain credit growth, profitability

S&P Global Ratings on Friday said RBI's regulatory action on Kotak Mahindra Bank could restrain the lender's credit growth and profitability.

The RBI on Wednesday barred Kotak Mahindra Bank from issuing fresh credit cards and onboarding new customers online.

Credit cards are a higher-yielding target growth segment for Kotak Mahindra Bank. This portfolio grew at 52 per cent year-on-year as of December 31, 2023, compared with total loan growth of 19 per cent, the US-based rating agency said.

"Action by the Reserve Bank of India (RBI) this week could push the bank to rely more on physical branch network expansion to supplement growth thus entailing higher operating costs," S&P said, adding that it could be a setback for credit growth and profitability.

This action will not, however, materially affect our ratings on Kotak Mahindra Bank (BBB-/Stable/A-3). This is because credit cards make up a small 4 per cent of total loans as of the end of December 2023. 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," S&P said.

RBI's actions on Kotak Mahindra Bank follow similar actions in recent years on other financial institutions in India.

S&P said in a similar case in 2020, when HDFC Bank was temporarily barred from sourcing new credit card customers, it took the bank more than a year to meet the RBI's requirements and have restrictions lifted.

In the past 18 months, Kotak Mahindra 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, S&P said.

Nevertheless, it will take time for the bank to implement changes and conduct a comprehensive external audit to address the RBI's concerns.

RBI's actions on Kotak Mahindra Bank follow 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.

This shows the regulator's commitment to strengthening the financial sector and its diminishing tolerance for operational deficiencies.

Systems stability and robust disaster recovery planning have become increasingly important with the rapid scale up in digital transactions in India.

"Regulators across many jurisdictions are adopting a similar playbook. The Monetary Authority of Singapore recently imposed a six-month ban on DBS Bank Ltd from making new acquisitions and closing branches or ATMs following several service disruptions in 2023," S&P noted.