South Indian Bank is gearing up for a more aggressive growth strategy in FY26, with a loan growth target of over 12%, sharply higher than the 9% growth achieved in FY25. This new target will be primarily driven by the Micro, Small, and Medium Enterprises (MSME) and retail loan segments, marking a strategic pivot from its earlier emphasis on corporate lending.

FY25 Performance and Course Correction

During FY25, the bank had initially projected a 10% loan growth, but the actual figure stood at 9% due to a ₹900 crore charge-off that impacted the final numbers. This underperformance has not deterred the bank from ramping up its efforts in the new fiscal year.

PR Seshadri, the Managing Director and CEO of South Indian Bank, has signalled a clear intent: “This is the year where we step on growth.” He underscored the bank's increased focus on MSMEs, which are expected to witness more than 20% growth this fiscal, a move that reflects both opportunity and strategic realignment.

Retail and MSME Segments to Drive Expansion

The bank’s loan portfolio will be increasingly concentrated around MSME and retail segments, reducing its corporate lending share over time. The decision is rooted in the recognition of higher returns and broader customer engagement in these sectors, particularly amidst evolving macroeconomic conditions.

This shift aligns with the broader industry trend, where banks are favouring granular, low-risk retail and SME credit over large-ticket corporate loans, which often come with higher risk and lower margins.

NIM Compression Likely, But Mitigation Strategies in Place

Despite the bullish loan growth guidance, the bank anticipates pressure on Net Interest Margins (NIMs). The NIM stood at 3.21% in FY25, but Seshadri has warned of a 10–12 basis point shrinkage in the coming months.

The reason behind the compression is multifaceted, including increased cost of funds, competition for high-quality assets, and repricing of loans. However, the bank is actively addressing these headwinds through strategies like:

• Shorter-tenure lending

• Dynamic repricing of loan products

• Enhanced asset-liability management

These steps are expected to soften the margin impact and maintain a healthy interest spread in a competitive market.

Strong Improvement in Asset Quality

One of the notable highlights from the bank’s FY25 performance was the improvement in asset quality:

• Gross Non-Performing Assets (GNPAs) declined to 3.2%

• Net NPAs reduced to 0.92%

• Slippages for Q4FY25 were limited to ₹206 crore, marking the lowest level in a long time

• Recoveries crossed ₹400 crore, outpacing fresh slippages

This improvement reflects better underwriting standards, proactive monitoring of the loan book, and efficient resolution mechanisms.

For investors and analysts, this signifies that the bank is on a stable footing and can support its aggressive loan growth with relatively low credit risk exposure.

Deposit Growth and Liquidity Management

On the liability side, the bank is aiming for deposit growth of 10-11% in FY26, in line with the industry average. Maintaining a balanced deposit profile will be crucial for funding its credit expansion plans, especially as interest rate volatility continues to impact the cost of funds.

The bank’s focus remains on building granular retail deposits, strengthening its CASA (Current Account Savings Account) base, and improving the loan-to-deposit ratio without compromising liquidity.

Cost Optimisation Strategy Gains Traction

In FY25, South Indian Bank successfully reduced its cost-to-income ratio by 431 basis points, bringing it down to 57%. This was achieved through:

• Controlled hiring

• Branch consolidation

• Process automation and digitisation

• Enhanced employee productivity

For FY26, the bank is targeting an additional 200–250 basis points reduction, which will further enhance profitability, especially amid margin compression concerns.

Strategic Takeaways and Future Outlook

1. Loan Book Realignment: The shift away from corporate lending towards MSME and retail segments is a clear effort to reduce asset concentration risks and enhance yield.

2. Focused Growth Approach: By prioritising sustainable segments and geographies with underbanked populations, South Indian Bank is creating a more balanced and resilient portfolio.

3. Tech-Driven Efficiency: Investment in digital platforms and core banking upgrades is expected to support customer acquisition, improve operational efficiency, and enhance product delivery.

4. Capital Adequacy and Liquidity: With a comfortable Capital Adequacy Ratio (CAR), the bank is well-positioned to fund its credit growth without immediate dilution risks.

5. Management Clarity: PR Seshadri’s leadership reflects a clear strategic direction with measured risk-taking and focused execution across key financial and operational metrics.

Conclusion

South Indian Bank’s FY26 roadmap reflects a confident and structured approach toward accelerated credit growth, even in the face of margin pressures and a dynamic external environment. Its focus on MSME and retail lending, backed by robust asset quality and improving operational efficiency, positions the bank as a strong contender in the evolving Indian banking landscape.

For readers and stakeholders, the story is one of transformation and calculated ambition — a regional bank scaling up with a well-calibrated strategy to create long-term value.

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