Utkarsh Small Finance Bank Limited

The bank reported a challenging Q2 FY26 with a net loss of ₹348 crores, primarily attributed to legacy stress factors and regulatory recalibrations. The overall gross loan book contracted by 2.3% year-on-year, largely due to an 11% contraction in the Joint Liabilities Group (JLG) portfolio during the quarter. Despite these headwinds, the capital adequacy ratio remained robust at 17.2% as of September 30, 2025, comfortably above regulatory thresholds.

While JLG faced challenges, non-JLG lending businesses demonstrated strong momentum, growing by 30% YoY and 4% QoQ. The Micro-Banking Business Loan (MBBL) portfolio grew by 39% YoY, now constituting 13% of the micro-banking loan book. The MSME loan book expanded by 33% YoY to ₹4,164 crores, and housing loans grew by 21% YoY to ₹947 crore. Secured lending now comprises 47% of the overall loan book, up from 38% in September 2024, reflecting a strategic pivot towards more resilient asset classes.

The bank acknowledged elevated overdue accounts and slower-than-expected recovery in collection sentiment, partly due to the MFIN Guardrail 2.0 framework. However, X-bucket collection efficiency in the JLG segment improved to 98.7% in September 2025 from 98.6% in June 2025. Fresh NPA slippages reduced significantly in H1 FY26 compared to H2 FY25, with Q2 MB slippages at ₹324 crores and non-MB at ₹139 crores. Management expects asset quality to improve meaningfully from Q3 onwards, with credit cost normalization by Q4.

Total deposits remained flat QoQ but grew 10% YoY, driven by strong retail term deposit growth of 29% YoY and 5% QoQ. CASA deposits increased 17% YoY and 6% QoQ, leading to an improved CASA-plus retail term deposit ratio of 78% as of September 25. The bank consciously reduced reliance on bulk deposits and calibrated deposit moderation to align with disbursement pace. Liquidity remained strong with a surplus of ₹4,400 crores and an LCR of 224%, with no short-term borrowings.

Utkarsh Small Finance Bank successfully raised ₹950 crores in equity capital through a rights issue in November 2025 and secured approvals for the proposed reverse merger of the holding company. The bank is undertaking a business transformation project, Utkarsh 2.0, to enhance technology and processes. Management targets a loan book growth of around 25% for the next 2-3 years, with secured lending exceeding 50%, aiming for a NIM of 8.5% and an RoE of 15% by FY28. They anticipate Q3 to be better than Q2, and Q4 onwards to show significant improvement in profitability and asset quality.

The bank has registered with CGFMU for credit guarantee coverage on eligible unsecured JLG and MBBL portfolios effective January 17, 2025. For covered loans, the scheme dictates that 3% of economic loss is borne by the lender, 25% by the bank, and 75% by the agency, resulting in 72-73% reimbursement by the agency. The premium cost is estimated at 1-1.2% of AUM per annum, with a maximum cap of 15% of the portfolio. This scheme is expected to de-risk exposure and support portfolio stability.