What is the significance of Kotak Mahindra Bank’s improved ratings? | Explained Premium

According to the United Nations’ Conference on Trade and Development (UNCTAD), the underlying logic of credit rating agencies is to avert the information asymmetry between borrowers and lenders about the latter’s creditworthiness. It further explains that issuers with lower credit ratings pay higher interest rates – reflective of the greater associated risk with lending to them, than the higher rated issuers.  

The story so far: Ratings agency S&P on Friday upgraded Kotak Mahindra Bank (KMB)’s ratings to ‘BBB’ from ‘BBB-’ after the Reserve Bank of India (RBI) lifted restrictions that barred the private lender from onboarding new customers and issuing fresh credit cards. Elaborating on the rationale, it held that the private lender was “well positioned” for growth in the next two years and “likely” to maintain “strong capitalisation”. “This, together with the banks’ good risk management and strengthened technology infrastructure, will support growth, particularly in new credit card issuances and digital onboarding,” it held.

In April last year, the apex banking regulator placed restrictions on KMB after having observed “serious deficiencies and non-compliances” about its IT inventory and user access management, data leak and leak prevention strategy, business continuity and disaster recovery rigour and drill, among other things. This was based on the regulator’s examination of the private bank’s systems for two years, that is, 2022 and 2023. The bank was also deemed non-compliant with RBI’s subsequent recommendations or ‘Corrective Action Plans’ (CAPs).

Back then, S&P had held apprehensions about the restriction to be a potential setback to their credit growth and profitability. It had observed that credit cards were KMB’s “higher-yielding target growth segment”. For perspective, the portfolio grew 52% YoY as on December 31, 2023, compared with a total loan growth of 19%.  

However, it refrained from altering their ‘BBB-’ rating. According to the agency, credit cards made up only a “small” 4% of their total loans as of December-end 2023.  

Rating agencies assess the credit worthiness and financial health of corporations, sovereigns, equities and bonds. Their reports are used by potential investors and lenders in making an informed decision about the assessed entity’s ability to meet payment obligations. In other words, they rank a corporation, equity or debt’s financial stability and/or its potential for high or low risk of default. Rating agencies periodically re-evaluate a rating in tandem with larger socio-economic and/or company-specific developments. These could entail a slowing lending economy, higher interest rate regime or in KMB’s case a regulatory action. 

According to the United Nations’ Conference on Trade and Development (UNCTAD), the underlying logic of credit rating agencies is to avert the information asymmetry between borrowers and lenders about the latter’s creditworthiness. It further explains that issuers with lower credit ratings pay higher interest rates – reflective of the greater associated risk with lending to them, than the higher rated issuers.  

The three prominent ratings agencies, viz., Standard & Poor’s, Moody’s and Fitch subscribe to largely similar grading patterns.