RBI’s directive credit negative for HDFC Bank: Moody’s

The Reserve Bank’s directive to HDFC Bank for temporarily stopping all launches of the Digital Business generating activities and sourcing of new credit card customers is “credit negative for the lender”, Moody’s Investors Service said on Monday.

According to Moody’s Investors Service, the move is credit negative as 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.

“We do not expect the regulators’ action to materially affect the bank’s existing business and financial profile.”

Nevertheless, it pointed out that RBI’s 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,”

HDFC Bank, the second-largest bank in India by deposits, leads in terms of digital transactions processed.

In the fiscal year that ended in March 2020 (fiscal 2020), about 95 per cent of the bank’s retail transactions were conducted digitally, up from about 85 per cent in fiscal 2018.

On December 3rd, the lender had announced that the RBI asked the bank to stop temporarily all launches under its Digital 2.0 initiative and stop sourcing new credit card customers.

The announcement came after the bank experienced multiple outages in its internet banking, mobile banking and payment utility services over the past two years.