Small Finance Banks: After asset quality hit, small finance banks to sharpen risk controls for 2026

Kolkata: Small finance banks, which were the worst hit by the microfinance crisis in terms of asset quality stress, are looking to deepen their risk-first reset in 2026 and bring down the share of the unsecured business further. They are also planning to grow the share of loans under credit guarantee cover to prevent fresh erosion of asset quality.

This strategy remains similar for all small finance banks with large microfinance exposure, especially for ESAF, Suryoday, Ujjivan and Utkarsh, which have a high share of unsecured portfolio.

Growth in collateralised lending to small businesses, and offering vehicle loans, affordable housing loans and gold loans to their customer segment remains the priority.

The Reserve Bank of India’s move to reduce the priority sector lending target for SFBs to 60% of adjusted net bank credit from 75% earlier has set an easier platform for these lenders to diversify beyond microfinance.

Ujjivan’s 52% portfolio was unsecured at the end of December 2025, while the share of unsecured books was 45% for Suryoday and about 37% for ESAF. Utkarsh, the bank with the highest bad loan ratio at 12.4% among its peers at the end of September, had 53% of the book unsecured while the latest number after the end of third quarter was unavailable.

The small finance bank group as a whole saw about 22% of their unsecured microfinance portfolio turn bad as of March last year, when the sectoral NPA including write-off accounts was around 16%. As part of the risk-first strategy, ESAF is eyeing to bring down the share of unsecured loans to 30% of its total portfolio by March 2027. “We continue to focus on gold loan, mortgage, mobility loans,” a senior executive said. Suryoday aims to bring down the unsecured share to 35-40% by FY27.

Ujjivan would take a longer time to reduce the unsecured share. According to a five-year business strategy adopted last year, the bank plans to reduce it to 30-35% by FY30 while the balance would be a secured portfolio.

For Utkarsh, the target is to have a secured lending share of more than 50% in the next two-three years.

Their de-risking strategy includes taking government guarantee cover for microfinance loans under the Credit Guarantee Fund for Micro Units (CGFMU) scheme as much as possible.

Lenders said a majority of new loans are covered under credit guarantee managed by the National Credit Guarantee Trustee Company, helping them to raise the share of guaranteed loans and bring stability in asset quality.

Jana Small Finance Bank, for example, aims to bring 70% of its unsecured loans under the guarantee programme by the end of this fiscal, a person in the know said. Jana’s share of the unsecured portfolio stood at around 27%.

Suryoday, one of the early movers in taking guarantee cover, continues this strategy helping it to have about 98% of the microfinance portfolio under the CGFMU Scheme.