Ujjivan SFB's Credit Rating Affirmed 'AA-; Stable' by CARE

CARE Ratings has reaffirmed Ujjivan Small Finance Bank (USFBL) with a 'AA-; Stable' credit rating for its ₹10,500 crore in debt and other instruments.

Rating Reaffirmation Details

This rating covers ₹500 crore in long-term bank facilities, ₹500 crore in subordinated debt, and ₹10,000 crore in fixed deposits. The stable outlook acknowledges the bank's strong capital position. However, CARE Ratings noted ongoing challenges, including muted profitability and asset quality stress within the micro-banking segment.

Importance of the Rating

A strong credit rating is vital for financial institutions like Ujjivan SFB, facilitating access to funding at better rates. It signals stability to depositors and investors, supporting market confidence and the bank's growth plans.

Strategic Shift and Past Challenges

Ujjivan SFB has been strategically shifting its loan portfolio, moving from its core micro-banking towards a greater share of secured lending. This aims to improve portfolio stability and reduce risk. Secured loans represented 48% of the portfolio as of December 31, 2025, with a medium-term target of 60-65%.

This transition, combined with stress in the micro-banking sector, has affected profitability, leading to increased credit costs and narrower Net Interest Margins (NIMs). The bank also faced regulatory attention, including a ₹6.70 lakh penalty from the RBI in February 2025 for not following directions on 'Loans and Advances'.

Impact of the Reaffirmation

The reaffirmed rating offers continued assurance for Ujjivan SFB's funding. It validates the bank's strategy of increasing secured lending, which is expected to enhance its risk profile over time.

Key Risks to Monitor

Persistent asset quality stress in micro-banking could continue to impact profitability. The bank's CASA ratio, currently at 27.32%, remains relatively low, affecting its cost of funds. Close monitoring is needed for the execution of the shift to a higher secured loan mix, which could moderate yields. Sustained vigilance is required regarding regulatory compliance, given past penalties from the RBI.

Comparison with Peers

AU Small Finance Bank holds an 'IND A1+' rating for its Certificate of Deposits from India Ratings. Equitas Small Finance Bank, another peer, has a 'IND AA-'/Stable rating for its Tier II Bonds and 'IND A1+' for its Certificates of Deposit from India Ratings.

Key Financial Metrics

• Return on Total Assets (ROTA) was 1.10% for 9MFY26, down from 3.50% in FY24.
• Gross Non-Performing Assets (GNPA) stood at about 2.38% as of 9MFY26.
• Net Non-Performing Assets (NNPA) were 0.57% as of 9MFY26.
• Capital Adequacy Ratio (CAR) was 21.62% as of 9MFY26, showing strong capital buffers.
• The CASA ratio was 27.32% as of December 31, 2025, with ongoing efforts to raise it.

What to Watch For

• Progress toward the 60-65% target for secured loans in the portfolio.
• Improvements in the CASA ratio and deposit base to lower funding costs.
• The bank's progress on its application for a Universal Banking License.
• Any future credit rating changes from CARE or other agencies.