Utkarsh Small Finance Bank tightens focus on secured lending while growing deposits
Utkarsh Small Finance Bank (USFB) reported a mixed September quarter, showing a deliberate pivot away from high-risk microfinance exposure toward more secured lending, even as overall loan growth slowed. The bank’s quarterly results underscore a strategy to de-risk its portfolio by reducing Joint Liability Group (JLG) exposure and boosting retail deposits as a stable funding source.
JLG exposure declines while non-JLG lending expands
The bank’s gross loan portfolio (GLP) declined 2.3% year-on-year to ₹18,655 crore in the quarter, with a sequential dip of about 3%. This contraction includes the impact of Inter-Bank Participation Certificates (IBPCs), which are short-term liquidity instruments that banks use to manage funding needs. Within the portfolio, JLG loans witnessed a sharp decline of 28.4% year-on-year, retreating to ₹7,613 crore. Management had previously flagged a strategic shift away from JLG lending as part of efforts to address rising non-performing assets and the stress within the microfinance segment.
Contrasting the drop in JLG exposure, the bank’s non-JLG loan book rose by 30.3% year-on-year to ₹11,042 crore. This indicates a deliberate allocation toward secured lending and other non-JLG segments, aligning with risk containment and asset quality objectives. The shift resonates with the broader trend among smaller lenders to recalibrate mix toward assets with lower delinquency risk and improved visibility on cash flows.
Deposits rise on the back of retail funding
Deposit growth was mixed but positive, with total deposits up 10% year-on-year to ₹21,447 crore. The growth was led by a robust expansion in retail term deposits, which climbed 28.8% to ₹12,257 crore. This trend suggests strong customer trust and a preference for stable, customer-sourced funding as opposed to more volatile bulk deposits, which declined by 23.5% to ₹4,712 crore.
The bank’s CASA ratio stood at 20.9% at quarter-end, up from 19.6% a year earlier. When CASA is combined with Retail Term Deposits, the ratio improved to 78% from 68.4% in the prior year. A higher CASA plus retail term deposit ratio reflects better core funding stability, which can cushion earnings volatility and improve liquidity coverage over time.
Liquidity and operational metrics
The bank reported strong liquidity with a Liquidity Coverage Ratio (LCR) of 219%, indicating ample high-quality liquid assets to cover short-term liabilities. Collection efficiency for the microbanking portfolio, excluding pre-payments, was 98.6% by the end of the quarter, signaling disciplined collection performance despite sector headwinds. These liquidity and collection metrics bolster the case for continuing the shift toward secured lending and a more resilient funding mix.
Strategic board action and market reaction
USFB’s board approved a ₹950 crore rights issue, announced in the preceding week, with details to be determined at the board’s next meeting. The planned rights issue could help boost capital adequacy and support the bank’s strategy to deepen secured lending and fund growth through retail channels. In the market, the stock traded modestly higher, with shares closing around ₹22.23, still below the IPO price of ₹25, reflecting cautious investor sentiment amid evolving risk management dynamics.
What this means for stakeholders
The September quarter results paint a picture of a bank actively managing risk through portfolio realignment. By reducing JLG exposure and steering growth into non-JLG, secured lending, USFB aims to improve asset quality while maintaining growth through resilient retail funding. For customers, this could translate into steadier loan disbursements in secured segments and enhanced service stability tied to a more robust funding base. For investors, the emphasis on secured lending, higher retail deposits, and a sizable rights issue with potential capitalization upside could influence risk-reward dynamics in the near-to-medium term.
Outlook
As USFB advances its strategic priorities, observers will monitor how the balance between secured lending and non-performing assets evolves, how the rights issue shapes capital adequacy, and how funding costs adapt to shifting deposit mixes. If the bank sustains strong collection efficiency and maintains a healthy LCR, the transition away from higher-risk JLG exposure could translate into steady earnings and improved resilience in a competitive microfinance landscape.
