Small finance banks are changing how they lend after a tough micro‑finance period, aiming to protect borrowers and investors alike.
Why the shift?
Last year, about 22% of unsecured micro‑finance loans turned bad, pushing overall non‑performing assets to roughly 16% for the sector. Banks with high exposure, such as ESAF, Suryoday, Ujjivan and Utkarsh, decided a risk‑first reset was needed.
Current unsecured exposure
- Ujjivan: 52% of its loan book unsecured (Dec 2025)
- Suryoday: 45% unsecured
- ESAF: around 37% unsecured
- Utkarsh: 53% unsecured, highest bad‑loan ratio at 12.4%
New lending focus
The banks plan to increase secured lending to small businesses, offering more vehicle loans, affordable‑housing loans, gold loans and other collateral‑backed products.
Targets for each bank
- ESAF aims to cut unsecured loans to 30% of its total portfolio by March 2027.
- Suryoday targets 35‑40% unsecured share by FY 27.
- Ujjivan plans a slower reduction, reaching 30‑35% unsecured by FY 30.
- Utkarsh wants more than 50% of its lending to be secured within the next two‑to‑three years.
- Jana Small Finance Bank intends to place 70% of its unsecured loans under a government guarantee scheme by the end of the current fiscal year.
Using government guarantees
All banks are using the Credit Guarantee Fund for Micro Units (CGFMU) and the National Credit Guarantee Trustee Company to cover a large portion of new micro‑finance loans. This helps raise the share of guaranteed loans and stabilises asset quality.
Regulatory help
The RBI lowered the priority‑sector lending target for small finance banks from 75% to 60% of adjusted net bank credit, giving them more room to diversify away from risky micro‑finance.
What it means for investors
By moving toward more secured loans and government guarantees, these banks hope to lower bad‑loan ratios, improve profitability and offer a safer environment for depositors and shareholders.
Remember, this is perspective, not a prediction. Do your own research before making any investment decisions.