RBI Action On Kotak Mahindra Bank To Hinder Credit Growth, Profitability: S&P Global
It will take time for the bank to implement changes and conduct a comprehensive external audit to address the RBI's concerns, the agency said.
The Reserve Bank of India's strictures on Kotak Mahindra Bank Ltd. on Wednesday are likely to impede the lender's credit growth and profitability, according to S&P Global Ratings.
As credit cards are a higher-yielding segment, the bank may strive to maintain portfolio growth by relying more on its physical branch network. But this also means higher operating costs for the bank, the ratings agency said on Friday.
On Wednesday, the RBI directed the lender to stop onboarding new customers through online and mobile banking channels and issue new credit cards. The harsh measure comes after multiple outages of the bank's core banking systems, underlining serious deficiencies in RBI's IT examinations in 2022 and 2023.
Credit cards account for only 4% of the bank's total loan book, growing by 52% year-on-year to Rs 13,882 crore in Q3. Kotak Mahindra Bank's total loan growth stood at 19% in the December quarter.
In this context, the RBI's order will not "materially affect 'BBB-' ratings" on Kotak Mahindra Bank by S&P Global Ratings. "The bank will still be able to cross-sell its other products to existing customers," the agency said.
It may take a year for the private lender to fix the issues related to system stability, patch management, and disaster recovery, as highlighted by the RBI.
In 2020, the central bank slapped similar measures on HDFC Bank Ltd., specifically ordering the largest private lender in the country to suspend new credit card customers.
"In the past 18 months, we understand 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. 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 Ratings said in the report.
RBI's recent regulatory actions on Kotak Mahindra Bank, HDFC Bank and some other financial institutions in India showcase the central bank'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," the agency said.