RBI ban severely damages Kotak Bank’s primary duties include 95% internet sales

The fourth-largest private sector lender, Kotak Mahindra Bank, took a severe beating on Wednesday from the Reserve Bank, which is practically completely crippling the company due to its recent practice of providing loans, credit cards, and other goods and services only online or via a mobile app.

The bank stock, which commands a high premium over peers, crashed over 17% to hit an intra-day low of Rs 1,602 and closed at still nearly 11% lower than before the action, in which the RBI ordered Kotak Bank “to cease and desist, with immediate effect, from on-boarding new customers through its online and mobile banking channels as well as from issuing fresh credit cards” for its ongoing failure to improve its IT risk mechanism for the previous two years.

Yes Securities’ study indicates that the bank will be severely harmed by the prohibition since almost all of its essential operations are now digital. Examine the proportion of digital sourcing for each of the following product lines: Shivaji Thapliyal, head of equity research at Yes Securities, stated in a note on Thursday evening that up to 99% of new credit card sales and 95% of new personal loans by volume are completed online, 90% of new investment accounts are opened online, and 79% of all new business loans are disbursed online. It should be mentioned that Kotak is the fifth-largest credit card issuer, accounting for 5.8% of the market for 100 million cards. The management of the company has been actively promoting this product for a while, claiming that the greater return it generates in conjunction with its higher price make it worthwhile to pursue.

When it came to unsecured books, such as personal loans, founder Uday Kotak led the bank with a similar perspective, once again basing it on the larger margins associated with such loans to the bank. The bank wants to raise the percentage of its unsecured retail book into the upper teens in the longer term, up from about 10% in the most recent quarters.

Speaking about the worst punishment on a major lender in recent memory (because HDFC’s December 2020 punitive action was limited to credit cards), Thapliyal of Yes Securities said that the penalty includes a prohibition on onboarding new clients via any and all online channels.