S&P Says RBI Action Could Restrain Kotak Mahindra Bank's Credit Growth, Profitability

S&P Global Ratings said the regulatory action preventing Kotak Mahindra Bank Ltd. from onboarding new customers online or issuing new credit cards may set back its credit growth and profitability.

On 24 April, the Reserve Bank of India (RBI) directed Kotak Mahindra Bank to cease and desist, with immediate effect, from i) onboarding of new customers through its online as well as mobile banking channels and ii) issuing fresh credit cards.

The banking regulator said these actions are necessitated based on significant concerns arising out of the RBI’s IT examinations of the bank for 2022 and 2023 and the continued failure on part of the bank to address these concerns in a comprehensive and timely manner.

S&P said credit cards are a higher-yielding target growth segment for Kotak Mahindra Bank and this portfolio grew at 52% year-on-year as of 31 December 2023 compared with total loan growth of 19%.

The RBI’s action could push the bank to rely more on physical branch network expansion to supplement growth and thus, entailing higher operating costs, it added.

The RBI's order will not, however, materially affect S&P’s ratings on Kotak Mahindra Bank (BBB-/Stable/A-3), the rating agency said in a statement. This is because credit cards make up a small 4% of total loans as of end December 2023, it added, noting that the bank will still be able to cross-sell its other products to existing customers.

S&P said it anticipates Kotak Mahindra Bank could potentially take a year to fully address the RBI's key concerns, which encompasses systems stability, patch management, and disaster recovery.

The rating agency noted that in a similar case in 2020 related to HDFC Bank Ltd.'s suspension on sourcing new credit card customers, it took the bank more than a year to meet the RBI's requirements and have restrictions lifted.

S&P said Kotak Mahindra Bank has made significant progress on technological enhancements in the past 18 months, 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,” it noted.

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