Explained: How RBI's Action On Kotak Mahindra Bank Will Affect Its Business

Kotak Mahindra Bank was dealt a blow by Reserve Bank of India (RBI) on Wednesday after it asked the former to stop onboarding new customer via its online banking channels and issue new credit cards. The central bank took the action after examination of the bank's IT system.

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."

Following the action, the shares of the bank plunged by over 11 per cent on Thursday as investors anticipate a hit to the business of the company due to the restrictions. Several brokerages have changed their outlook on the bank's business as they anticipate a tough ride in the medium term.

How Kotak Mahindra Bank's Business Will Be Affected

In the last 10 years, the company has invested to increase its share in the credit card business. As per data compiled by Motilal Oswal Financial Services Limited (MOFSL), the bank's share in the overall credit card spending has increased from 1.7 per cent in financial year 2014-15 to 4 per cent in financial year 2023-24. The market share has also increased in the outstanding credit cards from 2.5 per cent in FY15 to 5 per cent in FY24.

In the earnings call for Q3FY24, the company management had said that the credit card business is growing at a rapid pace. Virat Diwanji, Group President and Head Consumer Bank at Kotak Mahindra Bank, said, "We continue to invest in our card franchise with overall credit card advances is growing by about over 50 per cent on a YoY basis. Our focus on creating a differentiated customer value through strategic tie-ups and sponsorship is paying dividends."

MOFSL data showed that 99 per cent of new credit cards and 95 per cent of new personal loans were sold through digital channels. Due to the digital push, the share of unsecured loans in its overall book reached 11.6 per cent in Q3FY24. The bank had said in the last earnings call that it aimed to increase it to mid teens in the following quarters.

With retail book growing at a good pace, the revenue and profitability of the bank was in a good position. As per Emkay Global's estimates, the company saw a 19.2 per cent increase in net interest income in the financial year 2024. The standalone net profit is expected to be at Rs 12,866 crore for the last financial year.

The hit to digital channels through which the bank acquired a large share of new consumers is expected to affect the fundamentals significantly. Emkay Global said in a note, "We believe such restrictions should impact business growth, including KMB’s already dwindling Current Account Saving Account ratio (down 13 per cent from its peak to ~48 per cent) and its new card acquisition (CIF growth at 21 per cent YoY/spends at 34 per cent YoY). This will lead to earnings being hit in the medium term."

A similar sentiment was shared by analysts at MOFSL who said, "The RBI ban will disturb the growth trajectory of retail products and adversely impact overall margins and profitability. Besides, the IT deficiencies that have continued over the past couple of years, as mentioned by the regulator, do pose a concern, as KMB has been one of the most revered banks when it comes to risk management and overall governance practices."