Karur Vysya Bank is moving to a need-based lending model for its gold loan book, which accounts for 29 percent of its advances. The bank is tightening borrower verification and monitoring loan-to-value ratios to manage risks from volatile gold prices. Investors may watch how this stricter underwriting impacts loan growth and net interest margins in the coming quarters.
Karur Vysya Bank is changing how it handles gold loans to protect its balance sheet from the ups and downs of the gold market. CEO B Ramesh Babu stated that the bank is moving away from purely collateral-based lending, where the loan is given primarily based on the value of the gold. Instead, the bank is shifting toward a need-based and purpose-based lending model. This approach involves stricter verification to ensure that the credit is being used for genuine requirements, particularly in the agricultural sector.
Managing the Portfolio Mix
Gold loans currently make up 29 percent of the bank's total advances. While the bank has an internal limit set at 35 percent, the management is actively keeping the exposure below 30 percent. This disciplined approach suggests the bank is balancing its desire for growth in this sector against the potential risks of having too much exposure if gold prices become unstable. The bank is not just looking at the size of the loan but also the loan-to-value (LTV) ratio, which measures the loan amount against the value of the pledged gold. The current average LTV stands at roughly 65 percent.
Proactive Risk Monitoring
To manage potential losses, the bank is focusing heavily on accounts where the LTV ratio is between 70 and 80 percent. If gold prices fall, these loans become riskier because the collateral value drops closer to the loan amount. In such cases, the bank is taking proactive steps like making margin calls or requiring borrowers to provide additional collateral. By catching these issues early, the bank aims to keep its portfolio healthy even if market conditions change.
Margin Outlook and Competitive Pressure
Looking toward FY27, the bank expects its net interest margin—the difference between the interest it earns on loans and the interest it pays to depositors—to remain above 4 percent. To help with this, the bank is using recent inflows from foreign currency non-resident bank (FCNR-B) deposits, amounting to Rs 685 crore, to retire more expensive bulk deposits. This strategy helps reduce the cost of funds, which can support profit margins.
However, the bank faces competitive pressure. Approximately 57 percent of the bank's loan book is linked to the repo rate, making its interest income sensitive to rate changes and competitive pricing. With many lenders competing for customers, the bank must carefully balance offering competitive interest rates with maintaining its own profit margins. Investors will likely track the bank's upcoming quarterly results to see if these underwriting changes effectively protect asset quality without slowing down loan growth too significantly.