Whalesbook
SFBs Achieve Strong Loan Growth
Small Finance Banks (SFBs) in India concluded fiscal year 2026 with strong growth, reporting gross loan portfolio expansion of over 20%. This performance is well ahead of the broader banking sector, which saw credit expansion around 13.8% until mid-March 2026, according to Reserve Bank of India data. The momentum was boosted by a revival in microfinance lending, a segment important for lower-income customers.
AU Small Finance Bank, the largest SFB, reported a 21.3% year-on-year increase in its Assets Under Management (AUM) to ₹1.40 lakh crore. Equitas saw its AUM grow by 21.6% to ₹46,183 crore, while Ujjivan logged an impressive 26.6% growth, reaching ₹40,655 crore. These figures show strong demand for credit from the customer segments served by SFBs.
Strategic Shift: Less Microfinance, More Secured Loans
While the overall microfinance sector shows signs of recovery, data shows SFBs are strategically shifting their own lending focus. Although SFBs benefit from the sector's broader revival, their cumulative microfinance portfolios decreased to ₹49,889 crore by February 2026, down from ₹54,234 crore at the end of December 2025. This contrasts with other lenders, like private banks and non-bank microfinance institutions (NBFC-MFIs), which have increased their microfinance books.
This internal shift is evident in the strategies of key SFBs. Equitas, for instance, reported a 27.2% annual rise in its microfinance portfolio but simultaneously focused on growing its secured business to reduce risk. Ujjivan also reported growth in its microfinance lending (12.3%), but a significant trend is its push into secured lending. Its secured book grew 43.6% year-on-year to make up nearly 49% of its mix, alongside a substantial 292% surge in gold loans. This pivot away from unsecured microfinance towards secured products, such as loans against property, is a key strategy for SFBs balancing growth and risk.
Valuations and Performance Metrics
Valuations for SFBs present a mixed picture. AU Small Finance Bank, with its larger scale and consistent profitability, trades at a Price-to-Earnings (P/E) ratio of approximately 28.1x, reflecting investor confidence. Ujjivan Small Finance Bank is valued at a P/E of around 21.8x, suggesting a more moderate valuation. Suryoday Small Finance Bank trades at a P/E of about 19.5x, while Capital Small Finance Bank, which avoids unsecured lending, shows a significantly lower P/E of around 8.0x, potentially indicating a different risk profile.
Equitas Small Finance Bank shows a negative P/E ratio (around -91.70 to -101.17), which can stem from accounting adjustments or specific earnings profiles. Its ratio of low-cost current and savings accounts (CASA) dropped to 26%, and its ratio of loans to deposits rose to 93.7%, suggesting potential funding strain.
Challenges Ahead: Margins and Asset Quality
Despite the impressive headline growth, SFBs face pressure. Profits are constrained by tight margins and changing asset quality, particularly in the microfinance segment. ICRA projects that Gross Non-Performing Assets (NPAs) for SFBs could remain elevated at 3.7-3.9% by March 2026, with costs remaining high due to the transition to secured lending and lingering microfinance issues.
For AU Small Finance Bank, while profit jumped 26% YoY in Q3 FY26, its Net Interest Margin (NIM), which reflects profitability on loans, declined to 5.7% from 5.9% a year prior, showing higher funding costs are hurting profits. Managing funding costs and asset quality is key for SFB success going forward.
The broader microfinance sector, though showing signs of revival, saw a significant contraction in its loan portfolio in Q3 FY26, down 18.3% YoY, according to a MFIN report. While large SFBs are navigating this with strategic shifts, smaller players may face consolidation as funding becomes tighter and selective.
Outlook for SFBs
Analysts expect SFBs to continue growing, but the focus will shift from 'growth at any cost' to a more balanced approach incorporating funding stability and a higher mix of secured assets. The microfinance sector is poised for a strong growth period, with the gross loan portfolio expected to reach INR 10 trillion over the next 5-6 years, driven by digital adoption and government initiatives. SFBs that can effectively manage their funding costs and maintain a healthy asset quality profile amidst this changing environment are best placed for steady growth.