HDFC Bank’s multiple digital outages are credit negative: Moody’s

The Reserve Bank of India’s (RBI) action against HDFC Bank in response to weaknesses in its digital infrastructure and operational resilience is credit negative, rating agency Moody’s said on Monday. This is 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.

“We do not expect the regulators’ action to materially affect the bank’s existing business and financial profile. Nevertheless, 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,” analysts at Moody’s wrote. This has the potential to increase spending to improve the bank’s digital infrastructure, which would strain its profitability, they added.

On December 3, HDFC Bank announced that the RBI had asked the bank to temporarily stop all launches under its Digital 2.0 initiative and 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.

HDFC Bank is the second-largest bank in India by deposits and is a leader in terms of digital transactions processed. 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, Moody’s said.