A whiplash from Reserve Bank of India (RBI) led to a 10% fall in Kotak Mahindra Bank stock price. The Central Bank issued a press release dated April 24, 2024 directing Kotak Mahindra Bank “to cease and desist, with immediate effect, from onboarding of new customers through its online and mobile banking channels and issuing fresh credit cards.”
The RBI press release further clarified that the bank shall, however, continue to provide services to its existing customers, including its credit card customers. Kotak Mahindra Bank management should have seen it coming, especially after the recent service disruption resulting in serious customer inconveniences on April 15, 2024. The customers complained on social media platforms about poor internet banking services, failing debit card transactions and inability to login in Kotak mobile banking app. While the bank’s digital transactions have grown rapidly, IT resilience has not been strengthened likewise. According to the RBI press release, the bank’s core banking system (CBS) and its online and digital banking channels have suffered frequently and witnessed significant outages in the last two years in the absence of a robust IT infrastructure and IT risk management framework.
Thus, exercising its powers under Section 35A of the Banking Regulation Act, 1949, RBI issued a directive putting a temporary pause on getting new customers through online and mobile banking channels and issuing fresh credit cards. But what will be the impact on Kotak Mahindra Bank?
Credit cards constituted 3.7% of Kotak Mahindra Bank’s total loan book as on December 2023. The credit card portfolio will be constant as new cards cannot be issued leading to loss of market share to other highly competitive credit card issuing banks.
Credit card interest rates are higher than other retail loan categories such as home loan or auto loan. Thus, net interest margin (NIM) will witness impact with the non-issuance of new credit cards. But the impact will be deeper with the cessation of new customer onboarding through online and mobile banking channels. 95% of new personal loans by volume are sold digitally by Kotak Mahindra Bank and 79% of new business loans by volume are also disbursed digitally. Thus the entire unsecured loan book (personal loans + business loans + credit cards) which is 11% of total loan book will be impacted. The overall unsecured portfolio grew 40% YoY in Q3FY24 and credit cards grew 50% YoY in December Quarter 2023. As per Kotak Mahindra Bank’s disclosure to BSE, concrete steps are being taken by the bank to adopt new technologies and strengthen IT systems and swiftly resolve issues at the earliest. The Bank is coming out with its quarterly results tomorrow. And the management will have to answer a few tough questions.
