RBI action may hit Kotak Mahindra Bank as majority of business sourced digitally: Brokerages

The clampdown on Kotak Mahindra Bank (KMB) by the Reserve Bank of India (RBI) will impact the business of the lender as majority of the new business is sourced through digital channels, according to data made available by brokerages.

In a report, Citi said in the third quarter, that 95 percent of the new personal loans and 99 percent of the new credit cards were sourced digitally. In the same way, 90 percent of the new investments and 76 percent of the fixed deposits and recurring deposits were sourced digitally.

Further, the bank's credit card portfolio constituted 3.7 percent of the total advances of the bank in the third quarter, the brokerage said, adding that this portfolio grew 52 percent on a year-on-year basis.  According to Citi, the RBI action will adversely impact the growth, fee income and net interest margin (NIM). Further, the RBI action would mean that the pace of branch expansion needs to be accelerated, the brokerage said.

The problem erupted after the banking regulator, in a major regulatory move on April 24, barred Kotak Mahindra Bank (KMB) from onboarding customers through its online and mobile banking channels and issuing fresh credit cards, citing supervisory concerns over its technology platforms.

The actions followed an RBI examination of the bank's IT systems over the last two years and the bank’s “continued failure” to address concerns, the central bank said. The ban will not impact existing customers and Koak can continue to provide services to them, including its credit card customers, the RBI said.

The action will likely impact new customer acquisition of Kotak Mahindra Bank as a significant portion of new account openings happen through online and mobile banking channels. Also, the RBI action is bad news for KMB's credit card business as well. According to experts, the central bank's ban on issuing new credit cards could impact the bank’s co-branded credit card deals.

In a separate report, Macquarie too said a good proportion of assets and  liability products are sourced digitally. "A lot of savings accounts opened are through KMB's 811 digital channel. On the asset side, a majority of sourcing of unsecured products (9.2 percent mix ex-MFI) is done digitally. These segments have grown at 40 percent YoY (9M FY24) vs overall growth of 18% YoY," Suresh Ganapathy of Macquarie said in a note.

The credit card book only comprises around 4 percent of the total book, but it has been growing at greater than 50 percent on a YoY basis, Ganapathy said, adding on the liability front, the bulk of FDs (fixed deposits) and RDs

"Thus, ceasing on-boarding of new customers could affect business growth. In our view, the fact that Kotak has also seemed reluctant in opening branches, with fewer than 350 branches opened in the last four years, is also an issue. Hence, our belief that a ban on digital on-boarding is bound to affect growth over the medium term," said Ganapathy.

Announcing the action on Kotak, the RBI said these actions are necessitated based on significant concerns arising out of the Reserve Bank’s IT examination of the bank for 2022 and 2023. The RBI highlighted the continued failure on part of the bank to address these concerns in a comprehensive and timely manner.

According to the central bank, serious deficiencies and non-compliance 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, and so on.