Last week, banking sector regulator Reserve Bank of India (RBI) had asked the bank to temporarily stop all launches under its digital 2.0 initiative and stop sourcing new credit card customers.
MUMBAI: The Reserve Bank of India‘s (RBI) directions on HDFC BankNSE -0.96 % due to multiple outages in its internet banking, mobile banking and payment services in the last two years are credit negative for the bank and it will delay the launch of new digital initiatives and could likely increase spending which will strain the bank’s profitability, global credit rating agency Moody’s said in a report.
“The RBI action will delay the launch of HDFC Bank’s Digital 2.0 initiative, under which the bank aims to consolidate all customers’ digital transactions, including payments, savings, investments, shopping, trade, insurance and advisory services, into one platform. This has the potential to increase spending to improve the bank’s digital infrastructure, which would strain its profitability,” Moody’s said.
On December 3, the RBI asked the bank to temporarily stop all launches under its Digital 2.0 initiative and stop sourcing new credit card customers. The regulator’s response came after the bank experienced multiple outages in its internet banking, mobile banking and payment utility services over the past two years.
HDFC Bank is rated at Baa3 Negative in line with India’s sovereign rating. Moody’s said the regulators’ action is credit negative because the bank is increasingly relying on digital channels to source and service its customers.
“The recurring outages also risk hurting the bank’s brand perception among a growing and increasingly digitally savvy customer base, and increases the potential that clients switch to other banks, which would lead to a reduction in revenue and low-cost retail funding,” Moody’s said but added that it does not expect the regulators’ action to materially affect the bank’s existing business and financial profile.
HDFC Bank, the second-largest bank in India by deposits and is the market leader by value of digital transactions processed for April to September 2020 with a 20% share ahead of SBI according to RBI data analysed by Moodys.
In the fiscal year that ended in March 2020, about 95% of the bank’s retail transactions were conducted digitally, up from about 85% in fiscal 2018, Moodys said.