Kotak Mahindra Bank faces setback in credit card growth, profitability due to RBI's curbs: S&P Global

Global ratings agency S&P Global Ratings on Friday said that the recent regulatory action by the Reserve Bank of India may set back Kotak Mahindra Bank's credit growth and profitability. The central bank on Wednesday barred the lender from onboarding new customers online or issuing new credit cards. The central bank took the action after examination of the bank's IT system.

In a note, S&P Global said that credit cards are a higher-yielding 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,” it said.

It added that the curb will, however, not materially affect 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. The lender will still be able to cross-sell its other products to existing customers, the ratings agency said.

“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 ratings agency said.

In the order, RBI said that the investigation was conducted for years of 2022 and 2023. It said, "[The] actions are necessitated based on significant concerns arising out of Reserve Bank’s IT Examination of the bank for the years 2022 and 2023 and the continued failure on part of the bank to address these concerns in a comprehensive and timely manner. Serious deficiencies and non-compliances were observed in the areas of IT inventory management, patch and change management, user access management, vendor risk management, data security and data leak prevention strategy, business continuity and disaster recovery rigour and drill, etc."

Noting RBI's step, S&P Global said: “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.” 

Earlier in the day, Nomura India stated that Kotak Mahindra Bank may face a negative impact on its reputation after the RBI's action. The foreign brokerage firm said it will closely monitor the situation to see how the matter is resolved, particularly in light of the strongly worded nature of the RBI's order.

It added it is only a limited impact on Kotak’s business and profitability due to the ban. All eyes would be on further clarity from the management when Kotak Mahindra bank declares its March quarter results on May 4.

In 2020, HDFC Bank was barred by the RBI from sourcing new credit card customers, and it took the lender more than a year to meet the RBI's requirements and have the restrictions lifted.

Nomura India noted: "During the similar ban on HDFC Bank, its credit card market share had fallen from 25.3 per cent in December 2020 to 23.1 per cent in August 2021. HDFC Bank, too, had conducted a third-party IT audit, which was ratified by RBI." 

Nomura said digital customer acquisition and servicing has been at the forefront of the bank’s strategy but the bank has also acknowledged in the past that the value contribution from digital native customers (Kotak 811) is relatively low.

"Hence, it does not expect the direct business impact from these curbs to be very material. However, we will watch out for any step-up in tech spending for KMB. KMB has also been less aggressive on branch additions compared to other banks (it has added just 80-100 branches per year over the past three years). We will watch out for any change in the outlook here (led by curbs on digital customer acquisition) and any resultant impact on opex," Nomura said.

"RBI's move to prohibit Kotak Mahindra Bank from acquiring new customers online or issuing fresh credit cards is a significant setback. This action could hamper the bank's credit growth and profitability in the near term, as digital channels and credit cards are crucial for customer acquisition and revenue generation. However, the long-term impact will depend on the duration of the restrictions and the bank's ability to swiftly address the RBI's concerns. Investors and analysts will closely monitor the situation, as a prolonged ban could erode market share and competitive positioning," said Atul Parakh, CEO, Bigul.