SFBs Boost Gold Loans Amid Microfinance Woes

Small Finance Banks (SFBs) are significantly increasing their exposure to secured lending, with gold loans emerging as a key growth engine. This strategic shift aims to stabilize asset quality and earnings, driven by persistent high bad-loan ratios in their unsecured microfinance books and a regulatory push for diversification.

ESAF Small Finance Bank, for example, reported that its gold loan portfolio surged by 55% year-on-year to ₹8,858 crore by the end of FY26, now comprising 39.5% of its total asset base, surpassing the share of microloans at 39%. This growth contributed to ESAF's secured portfolio share rising to 61% of its asset base, up from 53% a year prior. Similarly, Jana Small Finance Bank witnessed a substantial 141% year-on-year increase in its gold loan book, reaching ₹2,358 crore, reflecting a strategic emphasis on secured assets.

This shift aligns with broader regulatory encouragement for diversification. The Reserve Bank of India (RBI) reduced the mandatory priority sector lending (PSL) target for SFBs to 60% from 75% effective FY26, freeing up capital that can be deployed into new, often secured, asset classes. This regulatory easing is projected to unlock approximately ₹40,000 crore for SFBs to invest in lower-risk, secured assets.

Microfinance Portfolio Under Pressure

Concurrently, the microfinance segment, traditionally a core offering for SFBs, has experienced contraction. Overall, SFBs' combined microfinance portfolio declined to ₹51,800 crore by the end of March 2026, from ₹55,700 crore in the preceding quarter. Utkarsh Small Finance Bank saw its Joint Liability Group (JLG) portfolio shrink to ₹5,789 crore from ₹9,207 crore a year prior, with an NPA ratio of 13.5% in its micro loans. Suryoday Small Finance Bank's JLG-based micro loans contracted to ₹1,512 crore from ₹2,062 crore a year ago, with a quarter of its current JLG book classified as non-performing. Jana Small Finance Bank also reported a high 16.6% NPA ratio on its JLG book of ₹3,298 crore.

Market Dynamics and Competition

The gold loan market in India is highly competitive, with an estimated organized market size of ₹7.1 lakh crore in FY23-24 and expected to grow to ₹15 lakh crore by March 2027. Banks, particularly public sector banks, command a dominant share, accounting for approximately 63% of the market by March 2024 and 82% by October 2024, often driven by their extensive reach and focus on agricultural loans. Established Non-Banking Financial Companies (NBFCs) like Muthoot Finance and Manappuram Finance also have a significant presence, especially in retail and semi-urban areas.

SFBs are entering this space, which is projected to grow annually by 11.90% through 2031. They could face pricing pressure from larger players with lower costs of funds. For example, while banks' borrowing costs are usually lower, SFBs like ESAF have reported a Net Interest Margin (NIM) of 8.5% for Ujjivan SFB in Q4 FY26, and Jana SFB's NIM was 7.22%, suggesting potential difficulties in matching the rates offered by larger, established banks.

Performance Snapshot and Universal Banking Aspirations

Some SFBs are showing signs of recovery and growth. ESAF Small Finance Bank's stock traded around ₹27.52 as of May 9, 2026, with a market value of approximately ₹1,329 crore. The bank reported a return to profitability in Q4 FY26 with a net profit of ₹23.5 crore, reversing a loss of ₹183 crore in the prior year's comparable quarter. Jana Small Finance Bank's stock was priced at $4.71 (approx. ₹390) as of May 4, 2026, with a market cap of $496 million (approx. ₹4140 crore). The bank reported a 34.90% YoY decrease in net profit for FY26 to ₹32.64 crore, despite revenue growth.

AU Small Finance Bank, leading the transition to a universal bank, saw its stock trade at ₹1,040.50 on April 22, 2026, with a market cap exceeding ₹78,000 crore. AU Small Finance Bank received initial approval for its universal banking license in August 2025 with modified RBI terms in March 2026. This transition signifies a strategic evolution for SFBs toward a wider banking model. Ujjivan Small Finance Bank has also indicated plans to re-submit its application for a universal banking license once its loan book is further diversified. The RBI's easing of Priority Sector Lending (PSL) rules, reducing the mandate from 75% to 60%, offers SFBs the flexibility to pursue such diversification strategies, a move welcomed by industry players.

Lingering Risks and Operational Hurdles

Despite the pivot, a significant portion of the portfolio for some SFBs remains exposed to the stressed microfinance sector, with high NPA levels persisting. This dual challenge of managing ongoing microfinance problems while building a new, competitive secured lending portfolio creates a difficult operational and financial situation.

Furthermore, an increased reliance on gold loans exposes SFBs to risks linked to collateral value. Fluctuations in gold prices can affect loan-to-value ratios and loan security. Additionally, the operational challenges of handling large volumes of physical gold collateral, including storage and security, add costs and risks.

Future Outlook

SFBs' strategic shift to secured lending is expected to continue, fueled by the need for stability and regulatory support. The financial performance in FY27 will be a key sign of the success of this strategic pivot, particularly for those aiming for universal banking status. However, the ability of SFBs to make significant inroads in the gold loan market will depend on their capacity to compete effectively with established players, manage funding costs, and navigate the inherent risks of collateral-based lending.