Suryoday Small Finance Bank Navigates Q2 FY26 with Strategic Digital Push Amidst Asset Quality Headwinds

Suryoday Small Finance Bank Limited has released its Q2 and H1 FY26 earnings, painting a picture of a bank in transition, strategically leveraging digital initiatives and diversifying its asset portfolio while grappling with profitability and asset quality challenges. The bank reported Gross Advances crossing ₹11,000 crore and Deposits nearing ₹12,000 crore as of September 30, 2025. Despite these growth milestones, the quarter saw a decline in key profitability metrics, reflecting the broader headwinds in the inclusive finance sector.

For Q2 FY26, the bank's Profit After Tax (PAT) stood at ₹30.4 crore, a 33% decrease year-on-year from ₹45.4 crore in Q2 FY25. Net Interest Income (NII) also saw a decline of 13.9% year-on-year, settling at ₹258.2 crore. The pre-provisioning operating profit experienced a significant drop of 37.6% year-on-year to ₹79.1 crore. This compression in earnings was influenced by a decrease in other income, primarily due to lower PSLC (Priority Sector Lending Certificate) income and a one-time gain from the investment book in the previous quarter. The Cost to Income ratio increased to 76.6% from 63.5% year-on-year, indicating higher operational expenses relative to income. Asset quality also deteriorated, with the Gross Non-Performing Assets (GNPA) ratio rising to 5.9% and the Net Non-Performing Assets (NNPA) ratio to 3.8%.

Strategic Evolution: Beyond Micro-Lending

Suryoday Small Finance Bank is actively reshaping its business model, moving beyond its traditional micro-lending roots towards a more diversified and secured asset portfolio. The Inclusive Finance (IF) book, while still significant, is seeing a shift towards individual Vikas Loans, which now constitute 70% of the IF portfolio, growing at an impressive 111% year-on-year in disbursements. This move is a direct response to the cyclicality and asset quality pressures observed in the Joint Liability Group (JLG) model.

The bank's retail asset portfolio, comprising mortgages and vehicle financing, is gaining momentum. The Commercial Vehicle (CV) book grew by 49% year-on-year, reaching ₹1,564 crore. Mortgages also expanded by 39% year-on-year to ₹2,555 crore. This diversification is a strategic imperative to build a more resilient and stable asset base. Management articulated a long-term vision to achieve an asset mix of approximately 65% secured and 35% unsecured within the next 3 to 5 years.

Digital Transformation and Risk Mitigation

Digitalization remains a cornerstone of Suryoday's strategy. The bank's digital banking initiatives have yielded tangible results, with digitally sourced deposits now accounting for over 10% of the total liability book, totaling approximately ₹1,300 crore. This digital channel has proven to be a cost-effective customer acquisition tool, attracting over 80,000 fixed deposit customers. New digital products, such as secured credit cards and credit lines on UPI through partnerships with entities like Paytm, are also showing promising traction, with over 50,000 customers onboarded for UPI credit.

In terms of risk management, the bank has proactively implemented Credit Guarantee Fund for Micro Units (CGFMU) cover for nearly 98% of its eligible unsecured portfolio since FY23. This strategic decision proved beneficial in Q2 FY26, as the bank successfully received its third claim of ₹313 crore, protecting its capital during a volatile period. The management emphasized that this cover is a crucial element in mitigating eventualities and safeguarding the bank's financial health.

Outlook and Management Commentary

Looking ahead, Suryoday's management remains cautiously optimistic, focusing on improving profitability and asset quality in the second half of FY26. They are targeting an ROA of approximately 1.2% and an ROE of 8-9% for the current financial year, with an aim to bring the Cost-to-Income ratio down to 70%. Advances growth is projected at 30%, with the Inclusive Finance segment expected to maintain a run rate of ₹450-500 crore monthly. The bank is committed to deepening its engagement with MSMEs, expanding secured lending, and strengthening its Vikas Loan franchise through digital-led journeys.

Despite the current challenges, the bank's strong capital adequacy ratio of 23.4% provides a solid foundation for future growth. The focus on granular retail deposits, micro-market expansion, and continuous evaluation of deposit rates underscores a disciplined approach to liability management. Suryoday Small Finance Bank is clearly executing a multi-pronged strategy to navigate the evolving financial landscape, aiming for sustained growth and improved financial health in the coming quarters.