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The Reserve Bank of India's (RBI) recent directive to Kotak Mahindra Bank has raised concerns about the lender's future credit growth and profitability, according to S&P Global Ratings. The central bank has barred the bank from onboarding new customers through online and mobile banking channels and issuing new credit cards, citing "serious deficiencies and non-compliances" and "continued failure" to address the issues.
The Reserve Bank of India’s (RBI) recent directive to Kotak Mahindra Bank has raised concerns about the lender’s future credit growth and profitability, according to S&P Global Ratings. The central bank has barred the bank from onboarding new customers through online and mobile banking channels and issuing new credit cards, citing “serious deficiencies and non-compliances” and “continued failure” to address the issues.
The RBI’s harsh measure comes after multiple outages of Kotak Mahindra Bank’s core banking systems, underscoring the regulator’s growing emphasis on system stability and robust disaster recovery planning in the rapidly digitizing Indian financial sector. S&P Global Ratings believes it may take the private lender around a year to fix the problems identified by the RBI.
The impact of the RBI’s restrictions is expected to be significant, as credit cards are a higher-yielding segment for the bank. To maintain portfolio growth, Kotak Mahindra Bank may need to rely more on its physical branch network, which could lead to higher operating costs. This, in turn, may constrain the bank’s credit growth and profitability.
However, S&P Global Ratings does not believe the RBI’s actions will “materially affect” the bank’s ‘BBB-‘ ratings, as it will still be able to cross-sell its other products to existing customers. The agency also notes that Kotak Mahindra Bank has made significant progress on technological enhancements in the past 18 months, including the hiring of senior-level executives in key technology roles.
The RBI’s recent regulatory actions on Kotak Mahindra Bank, HDFC Bank, and other financial institutions in India reflect the central bank’s commitment to strengthening the financial sector and its diminishing tolerance for operational deficiencies. As the pace of digital transactions continues to accelerate in India, the importance of systems stability and robust disaster recovery planning has become increasingly crucial for the country’s banking sector.
