Kotak Mahindra Finance Ltd

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: The rating assigned to Kotak Mahindra Finance Ltd’s (KMFL) fixed deposit programme has been reaffirmed and removed from ‘Rating Watch with developing implications’ following a review of its detailed business plan to convert itself into a bank. The rating assigned to the short-term debt programme has been reaffirmed.

KMFL’s conversion into a bank would provide comfort to fixed deposit holders given the systemic support available to banks in general and the Deposit Insurance & Credit Guarantee Corporation (DICGC) cover available to deposit holders in particular. KMFL would continue to benefit from the diversity in its businesses and income streams, which it proposes to increase on its conversion into a bank, its good asset quality and improving position in the commercial vehicle financing business. In addition, Crisil expects KMFL to maintain capital adequacy at relatively high levels, and the ratings would remain sensitive to any material variation in this expectation.

KMFL’s overall credit risk profile is, however, negatively affected by the uncertainties associated with the successful implementation of its plan to convert itself into a bank. These uncertainties cover its ability to mobilise retail deposits, build new business streams, generate fee-based income and sustain and manage asset quality. In Crisil’s opinion, negative variation in any of these elements would have an adverse impact on KMFL’s credit risk profile. KMFL, however, has a sound business and customer relationship platform on which it plans to build its banking business. In addition, Crisil continues to draw comfort from KMFL’s strong and dynamic management team and its track record in entering and managing new businesses.

Conversion to bank provides comfort to deposit-holders: KMFL’s conversion into a bank would result in it transferring its operations to an industry that has a relatively safer risk profile vis-a-vis the non-banking finance sector, given the systemic support banks tend to enjoy in the country.

KMFL’s existing depositors would get additional comfort because they would become depositors in a bank on its conversion and hence eligible for DICGC cover. In addition, KMFL’s liquidity profile will draw comfort from the access to the inter-bank market, which will enable it to maintain its short-term credit risk profile.