Q2 review signals a strategic pivot toward secured lending
Utkarsh Small Finance Bank (SFB) disclosed a mixed yet strategically revealing performance for the September quarter. While the overall loan book contracted modestly, the lender’s approach to risk and funding appeared to be shifting in favor of secured lending and more stable deposit bases. The quarterly results underscore a deliberate recalibration away from high-risk microfinance products toward better-collateralized assets and stronger core funding metrics.
Loan portfolio dynamics: Non-JLG gains, JLG wanes
The bank reported a 2.3% QoQ decline in its gross loan portfolio to ₹18,655 crore for the quarter, down from ₹19,101 crore in the year-ago period. On a sequential basis, the decline was 3%. This softening comes amid ongoing strategic measures, including the deliberate reduction of exposure to Joint Liability Group (JLG) loans, which are broadly associated with higher non-performing assets and stressed microfinance conditions in certain segments. Specifically, the JLG portfolio fell 28.4% year-on-year to ₹7,613 crore, reflecting management’s emphasis on risk containment and portfolio quality.
In line with this pivot, the bank reported a 30.3% year-on-year rise in its non-JLG loan book to ₹11,042 crore. This shift indicates a deliberate tilt toward secured lending and asset-backed exposures that can better withstand economic cycles and provide clearer recovery profiles. While the overall loan book softened, the mix improvements suggest better resilience and longer-tenor visibility for the bank’s asset base.
Deposit growth and funding quality
On the liability side, Utkarsh SFB’s total deposits rose 10% year-on-year to ₹21,447 crore, driven largely by retail term deposits, which surged 28.8% to ₹12,257 crore. This growth helps diversify funding sources away from bulk deposits, supporting more stable, low-cost funding going forward. However, bulk term deposits declined by 23.5% to ₹4,712 crore, reflecting a deliberate rebalancing toward retail deposits and a higher-quality funding mix.
The bank’s CASA (current and savings account) ratio improved to 20.9% from 19.6% a year ago, while the combined CASA plus retail term deposits ratio rose to 78% from 68.4%. These metrics suggest improved liquidity and a more durable retail funding base, which is particularly important in a period of tightening liquidity and evolving microfinance risk profiles.
Operational efficiency and liquidity posture
Collection efficiency for the microbanking portfolio, excluding pre-payments, stood at 98.6% at the end of the quarter, underscoring effective debt collection despite sectoral stress. Liquidity Coverage Ratio (LCR) remained robust at 219%, indicating ample liquidity buffers to meet short-term obligations and growth needs. The combination of high collection efficiency and a strong LCR supports the bank’s enhanced risk management framework as it leans into secured lending avenues.
Capital action and market outlook
In a move that could support expansion and strengthen the balance sheet, Utkarsh SFB’s board approved a ₹950 crore rights issue last week. The final details are expected to be determined at the board’s next meeting. If completed, the rights issue could bolster capital adequacy and provide additional headroom for portfolio diversification into secured lending segments.
Market reaction on the trading floor reflected cautious optimism. The stock closed modestly higher in the latest session, though it remained below the issue price, highlighting the delicate balance investors seek between growth prospects and risk-adjusted returns in a bank recalibrating its loan mix.
What this means for customers and shareholders
For customers, the shift toward secured lending could translate into more standardized credit products with clearer terms and potentially lower overall risk. For shareholders, the strategy targets improved asset quality and funding stability, which could translate into steadier earnings and a healthier balance sheet over the medium term. The right issue, if successfully completed, may provide the capital firepower needed to accelerate this transition while maintaining prudent risk controls.
As the sector continues to navigate macroeconomic headwinds and evolving regulatory expectations, Utkarsh SFB’s focused reallocation of lending exposure and steady improvement in funding funding metrics position it to weather volatility with greater resilience and a clearer path toward sustainable growth.
