MUMBAI: South Indian Bank is anticipating a slowdown in its gold loan growth due to new regulations imposed by the Reserve Bank of India (RBI). These tighter rules are expected to restrict the lender's capacity to fulfill rising demand for gold loans.
According to managing director and CEO P. R. Seshadri, the revised RBI guidelines, effective from April 1, will influence the bank's operations significantly. The new framework mandates that gold loans be categorized based on their intended use, with consumption loans capped at ₹2.5 lakh. Additionally, the guidelines impose stricter loan-to-value (LTV) ratios and verification requirements, along with limits on bullet repayments and timelines for the return and auction of gold collateral.
This regulatory tightening comes in response to a substantial increase in gold loans over the past two years, fueled by rising gold prices. The RBI has expressed concerns over the rapid growth in this sector, urging banks to enhance their underwriting standards. As of the end of FY26, loans against gold jewelry at banks surged 123.1% year-on-year, reaching ₹4.6 trillion.
Seshadri noted that the classification of loans by end use could lead to longer processing times and may reduce the loan amounts that some borrowers qualify for. This shift from a margin-based approach to a more regulated framework could limit the overall volume of business banks can conduct.
Despite the robust demand for gold loans, Seshadri indicated that South Indian Bank may not sustain its previous growth rates. The bank's gold loan portfolio grew by 46% year-on-year to ₹24,729 crore by March, significantly outpacing the overall advance growth of 14.5%.
Managing Risks Amid Regulatory Changes
In addition to regulatory challenges, South Indian Bank is closely monitoring the risks associated with volatile gold prices. The bank employs a “value at risk” framework to assess these risks and has conducted stress tests to ensure compliance with LTV and margin requirements.
Seshadri expressed confidence in the bank's ability to manage its gold loan portfolio effectively, citing a borrower profile that leans towards larger-ticket loans from affluent customers and exporters. This demographic provides additional security for repayments beyond the value of the pledged gold.
Future Growth Projections
Gold loans currently represent approximately 24% of South Indian Bank's total assets. While the bank sees potential for further growth, it aims to keep this portfolio within 29-30% of its balance sheet to maintain stability.
Looking ahead, South Indian Bank projects overall advances to grow by 15-16% in FY27, with deposits expected to increase at a faster rate than the market. The bank is focusing on enhancing its low-cost current account and savings account (Casa) deposits to support margin growth over time.
In Q4FY26, the bank reported a net interest margin (NIM) of 2.95%, up from 2.86% in the previous quarter. Deposits grew 15% year-on-year, reaching ₹1.2 trillion by March 31, with significant increases in both savings and current account deposits.
Despite the challenges posed by regulatory changes and market conditions, South Indian Bank remains committed to maintaining a solid strategy focused on quality assets and effective risk management.
