Small finance banks are adjusting their microfinance lending strategies by balancing geographic reach with concentration risks. While players like Equitas and Ujjivan show portfolio growth, others like Utkarsh are reducing exposure in specific states to prioritize stability.
Small finance banks (SFBs) in India are navigating a phase of strategic recalibration within their microfinance portfolios. Recent data reflects a divided approach, where some banks are aggressively expanding their reach across new geographies to drive growth, while others are intentionally slowing down to manage the risks associated with high exposure in specific regions.
Divergent Growth Paths for SFBs
Equitas Small Finance Bank has seen its microfinance portfolio grow significantly, with outstanding loans rising 70% year-on-year to ₹6,019 crore by the end of June. Similarly, Ujjivan Small Finance Bank reported a 17% increase in its micro-loan book, reaching ₹15,185 crore. These institutions are leveraging a broader geographic footprint to capture demand in the micro-lending segment, which typically offers higher interest income compared to secured lending products.
In contrast, Utkarsh Small Finance Bank has taken a more cautious route. Its microfinance portfolio contracted by 36% to ₹5,480 crore. This move appears to be a deliberate effort to reduce concentration risk, as nearly 72% of its joint liability group loans were previously focused within Bihar and Uttar Pradesh. By reducing its reliance on these two states, the bank aims to protect its balance sheet from localized economic shocks.
Understanding the Sector Dynamics
Microfinance remains a critical business for SFBs, but the strategy is increasingly about where and how to lend. For banks like Ujjivan, which maintains about 84% of its lending across its top 10 states, growth is currently supported by this diversification. Meanwhile, ESAF Small Finance Bank recorded a 16% rise in its micro-loan segment, helping drive a 27.4% increase in its total gross advances. AU Small Finance Bank, which operates at a much larger scale with gross advances of ₹1.41 lakh crore, continues to grow its total lending by 25.8%, though it balances this with a diverse mix of secured products.
Risks and Investor Monitorables
For investors, the primary monitorable in the microfinance space is the quality of the loan book versus the pace of growth. While higher yields are attractive, they often come with higher credit risk, particularly in unsecured micro-lending. Banks that expand too quickly into new areas may face challenges in monitoring asset quality. Conversely, banks that pull back, like Utkarsh, may see short-term pressure on revenue growth but could build a more resilient business model over the long term. Tracking how these institutions manage their non-performing assets and maintain net interest margins in the coming quarters will be essential to understanding which strategy is effectively building sustainable long-term value.