Kotak Mahindra Bank has seen a massive 13% erosion in market value after the Reserve Bank of India (RBI) applied the whip on the Uday Kotak-founded bank due to “serious deficiencies” in its IT infrastructure.

Barred from digital sourcing of customers and issuance of fresh credit cards, Kotak Mahindra Bank’s market capitalisation shrunk to Rs 3.19 lakh crore in two days and allowed Axis Bank to become India’s fourth-largest lender. After a strong performance in the fiscal fourth-quarter, Axis Bank’s market value rose nearly 5% to Rs 3.48 lakh crore.

HDFC Bank occupies the top spot with a market cap of Rs 11.5 lakh crore, followed by ICICI Bank with a value of Rs 7.78 lakh crore and State Bank of India (SBI) at Rs 7.15 lakh crore. Kotak Mahindra Bank has fallen a rank to take the fifth spot.

Incidentally, the RBI had imposed a similar ban on HDFC Bank in December 2020. The regulator removed the ban on the issuance of credit cards eight months later in August 2021 while the restrictions on HDFC Bank’s Digital 2.0 programme only got lifted 15 months later in March 2022.

"During the similar ban on HDFC Bank, its credit card market share had fallen from 25.3 per cent in December 2020 to 23.1 per cent in August 2021. HDFC Bank, too, had conducted a third-party IT audit, which was ratified by RBI," Nomura India said.

On digital onboarding of customers, Nomura said it does not expect the direct business impact from these curbs to be very material. The bank has acknowledged in the past that the value contribution from digital native customers is relatively low. But Kotak Mahindra Bank has also been less aggressive on branch expansion compared to other banks. It has added just 80-100 branches per year over the past three years.

Kotak Mahindra Bank has 5.9 million credit cards outstanding, accounting for 5.8% market share on cards in force. Credit cards account for 4% of the bank's overall loans.

The restrictions on issuance of new credit cards may impede with the bank’s medium-term objective of scaling-up unsecured retail loans to a “mid-teens percentage” of its loan book, Nomura said. As of Q3 of FY24, this is at 11.6%.

"We expect the impact of RBI’s curbs on Kotak’s business and profitability to be limited. However, we believe there will be a reputational impact on the bank, and we will watch out for how this matter resolves itself, especially considering the strongly worded nature of RBI’s press release,” the foreign brokerage firm said. 

The duration of the ban will be important to note while assessing on how deep the impact would be on the bank’s market value. During the 15-month ban, HDFC Bank’s value decreased by 20%. 

Kotak Bank might face a similar devaluation in the medium term, brokerage firm Macquarie said.