RBI's Restriction On Kotak Mahindra Bank May Impede Credit Growth: S&P

The Reserve Bank of India imposed restrictions on Kotak Mahindra Bank from issuing new credit cards and enrolling new customers online

The regulatory measures taken by the Reserve Bank of India (RBI) against Kotak Mahindra Bank could potentially limit the bank's credit expansion and profitability, said S&P Global Ratings on Friday. On Wednesday, the RBI imposed restrictions on Kotak Mahindra Bank from issuing new credit cards and enrolling new customers online.

According to the US-based rating agency, credit cards represent a high-yielding growth segment for Kotak Mahindra Bank. As of December 31, 2023, this portfolio experienced a remarkable 52 per cent year-on-year growth, outpacing the total loan growth of 19 per cent.

"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. It added that this restriction might pose a challenge to the bank's credit expansion and profitability.

Nevertheless, this measure is unlikely to significantly impact our ratings on Kotak Mahindra Bank (BBB-/Stable/A-3), states S&P. This is because credit cards constitute only a minor portion, accounting for 4 per cent of total loans as of December 2023. Additionally, the bank retains the ability to cross-sell its other products to its existing customer base.

"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.

The RBI's measures against Kotak Mahindra Bank are consistent with actions taken against other financial institutions in India in recent years. S&P highlighted a comparable instance in 2020 when HDFC Bank faced temporary restrictions on acquiring new credit card customers. It took the bank over a year to fulfil the RBI's stipulations and have the restrictions lifted.

S&P noted that over the last 18 months, Kotak Mahindra Bank has achieved notable technological advancements, highlighted by recruiting senior-level executives for key positions such as Chief Technology Officer and Chief Experience Officer.

However, the bank will need time to enact adjustments and undergo a thorough external audit to address the RBI's concerns. The RBI's interventions concerning Kotak Mahindra Bank are in response to multiple outages experienced by the bank's core banking systems, online platforms, and digital banking channels, as well as deficiencies highlighted during the RBI's IT examinations conducted in 2022 and 2023.

"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.