HDFC Bank's frequent digital outages credit negative, says Moody's

Rating agency Moody’s said on Monday that the temporary ban on acquiring news credit card customers and new digital launches imposed on HDFC Bank is credit negative as the lender increasingly relies on digital channels to source and service customers.

Reserve Bank of India’s action was in response to weaknesses in HDFC Bank's digital infrastructure and operational resilience.

The recurring outages also risk hurting the bank's brand perception among a growing and increasingly digital-savvy customer base, and increase the chances of clients switching to other banks, which would lead to a reduction in revenue and low-cost retail funding, Moody’s said in a statement.

The country’s largest lender communicated the RBI direction on December 3, 2020. The announcement came after the bank experienced outages in its internet banking, mobile banking and payment utility services over the past two years.

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

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. This might lead to an increase in spending on the bank's digital infrastructure, thereby straining its profitability.

HDFC Bank is a leading player in terms of digital transactions processed. In FY20, nearly 95% of the bank's retail transactions were conducted digitally, up from about 85 per cent in FY18.

Recently, on November 21, 2020, the bank's internet banking and payment system were temporarily shut due to a power failure in its primary data centre. Earlier, in December 2019, the bank's internet banking and mobile banking applications were unavailable for a few days and the bank faced a similar issue with its newly launch mobile banking application in November 2018, Moody's added.