Strategic shift: From JLG to secured lending
Utkarsh Small Finance Bank (USFB) reported a mixed performance for the September quarter, underscoring a deliberate shift in its lending strategy. The bank’s overall gross loan portfolio (GLP) declined by 2.3% year-on-year to ₹18,655 crore, with a sequential dip of 3%. This contraction includes Inter-Bank Participation Certificates (IBPCs), which are short-term funding tools used by banks to manage liquidity by temporarily selling assets like loans to other lenders. The development signals a cautious stance on growth in unsecured microfinance segments amid rising stress in the microfinance space.
JLG exposure contracts as focus shifts to secured lending
The bank’s Joint Liability Group (JLG) loan portfolio, a core microfinance product, fell 28.4% year-on-year to ₹7,613 crore. Management had earlier flagged a strategic pivot away from JLG lending due to rising non-performing assets, higher provisioning needs, and broader stress in the microfinance ecosystem. The September quarter’s numbers reflect that pivot, with the non-JLG loan portfolio rising 30.3% to ₹11,042 crore.
Deposits: Retail growth cushions funding profile
On the funding side, USFB reported a 10% year-on-year increase in total deposits to ₹21,447 crore for the quarter. This growth was driven largely by retail term deposits, which surged 28.8% year-on-year to ₹12,257 crore, signaling consumer trust and a preference for stable, longer-tenor funding. In contrast, bulk term deposits declined 23.5% year-on-year to ₹4,712 crore, suggesting a shift away from large-ticket, potentially costlier funding sources.
Quality of funding and liquidity metrics
The bank’s liquidity position remained robust. The CASA ratio rose to 20.9% from 19.6% a year earlier, and the combined CASA plus retail term deposits ratio improved to 78% from 68.4% in the prior year quarter. These metrics indicate a healthier and more stable deposit mix, with a larger portion of funds coming from retail and low-cost sources relative to wholesale funding.
Asset quality and operational indicators
Collection efficiency for the microbanking portfolio, excluding pre-payments, stood at 98.6% at quarter-end, suggesting strong recovery performance and disciplined repayment behavior among borrowers. The bank’s Liquidity Coverage Ratio (LCR) was reported at 219%, pointing to ample liquidity to meet near-term obligations. While deposit growth supports liquidity, the loan book’s overall contraction and the JLG decline highlight the ongoing realignment of risk and return in USFB’s portfolio.
<h2 Outlook and corporate actions
USFB’s board recently approved a ₹950 crore rights issue, which could bolster capital adequacy and support its evolving risk-weighted asset mix as it emphasizes secured lending. The exact terms and deployment of the rights issue will be clarified after the board meeting on October 8. Investors will be watching how the bank balances credit growth with asset quality in a possibly tighter macro environment, while continuing to build a deposit base with a strong retail focus.
Market reaction and what this means for stakeholders
In intraday trading, Utkarsh Small Finance Bank shares rose about 2% to ₹22.23, still trading below the IPO price of ₹25, reflecting cautious optimism about the bank’s strategic pivot and funding stability. For customers and investors, the combination of higher retail deposits and a shift away from JLG lending could translate into steadier funding costs and improved risk controls, albeit with the trade-off of slower microfinance-driven loan growth in the near term.
As the bank realigns its portfolio toward secured lending and a stronger retail base, stakeholders will look for continued improvements in asset quality metrics, a resilient deposit franchise, and transparent updates on the contemplated rights issue and its impact on capital adequacy.
