RBI’s Digital Lending Crackdown To Dent Kotak’s FY25 Profit By Up To INR 450 Cr

Kotak Mahindra Bank’s digital banking business is expected to see a significant dent in its profit-before-tax (PBT) by INR 300-450 Cr in FY25 in the wake of the Reserve Bank of India’s (RBI) regulatory action against the Mumbai lender, said Ashok Vaswani, managing director and chief executive in a post-earnings analyst call.

Vaswani emphasised that the RBI’s financial impact on the private lender’s business is ‘minimal,’ noting that only the onboarding of new customers has been barred while existing customers can still access loans or make new deposits.

“We remain fully focused on mitigating the current challenges imposed on Kotak Mahindra Bank’s digital lending business. Our focus for this fiscal year will be to deepen existing customer relations through cross-selling instead of new acquisitions,” he said.

Last month, RBI barred Kotak Mahindra Bank from onboarding new customers through its online and mobile banking channels.

“The Reserve Bank of India has today, in exercise of its powers under Section 35A of the Banking Regulation Act, 1949, directed Kotak Mahindra Bank Limited to cease and desist, with immediate effect, from (i) onboarding of new customers through its online and mobile banking channels and (ii) issuing fresh credit cards.,” the central bank said in a statement.

The RBI said that the bank will continue to provide services to its existing customers, including its credit card customers.

The central bank stated that it implemented these measures in response to concerns arising from its IT examination of the bank and its persistent failure to comprehensively and promptly address these concerns.

Vashwani noted that the financial repercussions are projected to be minimal. This estimation arises from the fact that the cost of acquisition outweighs the revenue generated in the initial year of onboarding new customers.

“For Kotak 811 and new credit card issuances, the acquisition cost is usually higher than revenue in the first year of customer onboarding. The amount of technology spent involved here is also higher, so we need to re-prioritise that,” he said.

This is not the first instance of the central bank taking such action. In 2020, the RBI imposed similar restrictions on HDFC Bank, preventing the bank from initiating new digital business activities and acquiring new credit card customers.

These restrictions on HDFC Bank were lifted nearly two years later, in 2022.

In recent years, the RBI has taken several measures to enhance regulation within the rapidly expanding digital banking and lending sector. These actions encompassed the issuance of digital lending guidelines and the establishment of a framework for payment aggregators.

Earlier this year, the RBI also imposed curbs on Paytm Payments Bank’s multiple business activities. However, this action against the payments bank stemmed from persistent non-compliances and continued material supervisory concerns.