South Indian Bank focussing on high-yield retail assets to boost margins, cutting back short-term corporate lending,says CEO PR Seshadri

P R Seshadri, South Indian Bank

• South Indian Bank targets retail and non-corporate assets for better yields.
• Corporate disbursements fell as bank moved away from short-term loans
• Gold loans grew 26% YoY, driven by stable prices and RBI policy.

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South Indian Bank has accelerated its shift towards higher-yielding retail and non-corporate assets, reducing short-term corporate lending and lengthening the tenor profile of its balance sheet, managing director and chief executive officer PR Seshadri told Moneycontrol in an interview.

Corporate disbursements declined in the December quarter, as the bank moved away from short-duration loans that offer lower spreads. Extending asset tenors helps improve margins, even though it reduces liquidity from very short-term corporate assets, he said. Edited excerpts of the interview:

This has been another strong quarter on asset quality and profitability. What drove the Rs 374 crore profit?

Multiple factors contributed to the performance. First, average assets grew at a healthy 11-12 percent year-on-year, which supported income growth. More importantly, the asset mix improved meaningfully. We saw strong growth in non-corporate businesses, which are higher yielding. As a result, net interest income rose 9 percent quarter-on-quarter between Q2 and Q3. This sequential improvement, rather than a year-on-year comparison, added significantly to revenues and flowed through to profitability.

In addition, we have been steadily re-architecting our balance sheet. Retail, MSME and gold loans now form a larger share of the book, helping revive net interest income. Margins expanded by 6 basis points (bps) quarter-on-quarter to 2.86 percent from 2.80 percent. Alongside this, stringent cost controls over the last two years ensured strong operating leverage, boosting profits.

You have been focusing more on higher-yielding assets. Is that why corporate disbursements fell sharply?

Yes, that is largely by design. We are consciously de-emphasising short-duration corporate assets and lengthening the tenor of our asset book. Earlier, we had a large proportion of very short-duration loans, which provided liquidity but came at lower spreads. By moving towards longer-duration assets, we earn better yields. This shift explains the decline in corporate disbursements and also supports margins over time.

Gold prices have risen in recent months. How did gold loan advances perform in the December quarter and what about LTVs?

The gold loan book grew strongly, rising about 26 percent year-on-year. We have implemented the new RBI guidelines on income-yielding gold loans, where permissible LTVs are slightly higher than the earlier 75 percent cap.

While there has been some upward movement in LTVs, they remain well contained. The average portfolio LTV is around 65 percent, including portfolio purchases. For income-yielding, non-agriculture gold loans—where borrowers can demonstrate business cash flows, LTVs tend to be marginally higher, but overall risk remains well managed.

Last year, gold loan growth was about 13 percent and you sounded cautious due to rising prices. How do you explain the 26 percent acceleration?

The acceleration reflects our improved preparedness. We built robust systems to leverage the new RBI policy and strengthened risk management frameworks. Gold prices have also shown relative stability at current levels.

We now use a value-at-risk framework to assess the impact of potential gold price movements on the portfolio based on historical trends. Based on these risk assessments, we were comfortable that risk levels were acceptable, which allowed us to accelerate growth in this segment.

NRI deposits have grown consistently over the past few years but saw a modest sequential growth in Q3. Why?

On a year-on-year basis, NRI deposits have actually grown well, about 9 percent so far, and we are seeing strong momentum in account openings, CASA balances and overall volumes compared to last year.

With the rupee trading near 90 to the dollar, many NRIs see this as an attractive time to remit funds to India. We do not see this as a concern and expect growth to improve going forward.

What is your outlook for NRI deposit growth?

We expect NRI deposit growth to move into double digits. In the near term, 12–13 percent growth is a reasonable expectation, and it could trend towards the mid-teens.

How does rupee depreciation impact NRI deposits?

Rupee depreciation generally encourages remittances into India. NRIs remit funds both for family needs and to build savings or a corpus in India. When exchange rates and interest rates are favourable, the latter category of remittances increases.

Additionally, rising geopolitical uncertainty often leads NRIs to park more funds in India. All these factors should support deposit growth in the 12–14 percent range.

On the liabilities side, how much of the RBI’s 125 bps rate cut has been transmitted and what is the impact on margins?

We transmit repo rate changes on a T+1 basis. So the December 25 bps cut was fully transmitted the next day. However, since it came mid-month, the impact on margins in the quarter reflects less than a full month.

In the current quarter, we will see the full impact of the 25 bps cut. That said, a large portion of our deposits are also being repriced during the quarter, which will partially offset the margin impact. Overall, we expect the impact on margins to be only a fraction of the repo cut.

If there is another rate cut in February, that impact is not factored in yet, but we do not expect a material hit to revenues.