MUMBAI: The Reserve Bank of India’s (RBI) tighter gold loan rules are likely to slow growth in one of South Indian Bank’s fastest-growing businesses, with the lender saying the new rules could constrain how much demand it can meet.
“The revised RBI guidelines will have a certain amount of impact on how much business we can do,” managing director and chief executive officer P. R. Seshadri told Mint.
The new framework, effective 1 April, requires lenders to classify gold loans as either ‘income generating’ or for ‘consumption purposes’, with the latter capped at ₹2.5 lakh. The norms also tighten loan-to-value (LTV) ratios, introduce stricter verification requirements, impose 12-month limits on bullet repayments and set timelines for the return and auction of gold collateral.
The rules come amid a sharp rise in loans against gold and gold jewellery over the past two years, driven partly by soaring gold prices. RBI had flagged risks from rapid growth in the segment, urging lenders to tighten underwriting standards. Loans against gold jewellery at banks rose 123.1% year-on-year to ₹4.6 trillion at the end of FY26, after growing 121.1% in the previous year.
Seshadri said the need to classify loans by end use would lengthen processing times and could reduce the loan amounts some borrowers qualify for, potentially limiting the overall volume of business banks can undertake. Earlier, lenders largely followed a margin-based approach, assessing the value of the pledged gold and sanctioning loans after applying a margin, he said.
“That no longer is a mechanism that RBI allows us to follow,” he said, adding that despite robust demand, the bank’s ability to meet it may decline. “We don't think that we can continue to grow at this level.”
South Indian Bank’s gold loan portfolio rose 46% year-on-year to ₹24,729 crore at the end of March, far outpacing the bank’s overall advance growth of 14.5%, which took total gross advances to ₹1 trillion. Net profit for the March quarter (Q4FY26) rose 19.3% from a year earlier to ₹408 crore, according to Q4 results announced last week.
Apart from regulatory tightening, the bank is also closely monitoring risks from volatile gold prices.
Seshadri said the bank tracks gold loan risk through a “value at risk” framework and recently conducted stress tests to ensure systems were calibrated for LTV and margin requirements.
“The system of processes associated with managing this portfolio have been tested, and they are working. And we're also managing the margins appropriately. We are reasonably confident that we can manage this,” he said.
He added that the bank draws comfort from the profile of its borrowers, saying the portfolio is skewed towards larger-ticket loans to affluent customers and exporters rather than small-ticket retail borrowers. That gives the bank additional comfort beyond the value of the pledged gold, as borrowers have other income streams to service repayments.
Gold loans currently account for around 24% of South Indian Bank’s total assets. While the bank still sees room for growth, it does not want the portfolio to exceed 29-30% of the balance sheet, Seshadri said. “We can't continue to grow at this 40-odd percent.”
Deposit growth to aid margins
South Indian Bank expects overall advances to grow 15-16% in FY27, while deposits are projected to grow faster than the market.
“Business traction improved in Q4FY26, with advances growth accelerating to 15.8% YoY in Q4FY26 (from 12.2% in Q3 FY26), primarily driven by strong traction in gold loans (including agri gold), which grew 45.6% YoY and now constitute 24.7% of the overall loan book,” Anand Rathi Research said in a post earnings note, adding that the management has guided for mid-teen credit growth in FY27.
Seshadri said liabilities are expected to grow faster than the market, aided by stronger mobilization of low-cost current account and saving account (Casa) deposits, which should support margins over time.
“We have lower NIM (net interest margin) than many people in the industry. We are at 2.5%, so we think that our NIM will continue to grow,” he said. The bank reported a NIM of 2.95% for Q4FY26, compared with 2.86% in the previous quarter and 2.80% a year earlier.
Deposits grew 15% year-on-year and 4% sequentially to ₹1.2 trillion as of 31 March. Savings deposits rose 17% year-on-year and 6% quarter-on-quarter to ₹32,475 crore, while current account deposits increased 19% year-on-year to ₹71,246 crore. Casa ratio improved 75 basis points year-on-year and 28 basis points sequentially to 32.12%.
Seshadri said the bank expects margins to improve despite limited room to cut deposit rates. South Indian Bank is maintaining higher liquidity buffers amid concerns related to West Asia, which has kept deposit rates elevated and could weigh on margins in the near term.
“Whatever rates we are offering, as of now we are continuing to have,” Seshadri said, adding that this is expected to support strong growth in current account deposits.
“We do have the lowest cost of funds in our peer group, and we intend to keep it that way because we have traded price and quality for NIM. Basically, we try to ensure that we get good quality assets. So our losses are lower, but we are willing to accept slightly lower prices on the assets. That strategy is solid.”
Anand Rathi Research expects margins to remain rangebound, with pressure on cost of funds likely to be offset by improving loan mix, led by higher share of retail loans and loans to micro, small and medium enterprises (MSMEs).
