Utkarsh Small Finance Bank Navigates Q2 FY26 with Strategic Recalibration Amidst Industry Headwinds

Utkarsh Small Finance Bank, a prominent player in India's financial landscape, recently unveiled its performance for the second quarter and half-year ended September 30, 2025. The period was marked by a deliberate strategic recalibration, as the Bank navigated transitional headwinds and regulatory shifts within the microfinance sector. While the Bank reported a net loss for the quarter, key operational metrics and forward-looking strategies signal a focused approach towards long-term resilience and diversified growth.

The Bank's financial performance for Q2 FY26 saw total interest earned at Rs. 840 crore, a 15% decrease year-on-year. Net interest income stood at Rs. 350 crore, down 37% from the previous year. The Bank reported an operating profit of Rs. (3) crore, leading to a net loss of Rs. 348 crore for the quarter. For the half-year, the net loss was Rs. 588 crore. Despite these figures, the Bank's capital adequacy ratio remained robust at 17.21% as of September 30, 2025, comfortably above regulatory requirements, bolstered by a successful Rs. 950 crore rights issue in November 2025.

Portfolio Evolution and Diversification

The Bank's loan portfolio witnessed a contraction, primarily driven by a deliberate moderation in the Joint Liability Group (JLG) segment. The JLG loan book declined by approximately 11% during the quarter, contributing to a 2.3% year-on-year decrease in the overall gross loan portfolio. This strategic shift is a direct response to the revised regulatory framework under MFIN Guardrail 2.0, which limits borrower-level leverage and has led to a slower recovery in collection sentiment. Management emphasized strengthening collections over aggressive expansion, operationalizing a specialized call center for overdue accounts and expanding its collection workforce to 1,500 personnel.

In contrast, the non-JLG lending businesses demonstrated healthy momentum. The Micro-Banking Business Loan (MBBL) portfolio emerged as a significant growth driver, expanding by 39% year-on-year and now constituting 13% of the micro-banking loan book. Other retail loans, including MSME, Housing, and CE & CV, also showed robust growth. The share of secured loans in the overall portfolio increased to 47% from 38% in September 2024, reflecting a strategic pivot towards more resilient asset classes. This diversification is crucial for reducing cyclicality in credit costs and opening new avenues for growth beyond traditional JLG loans.

Strengthening Funding and Risk Management

On the liabilities front, total deposits grew by 10% year-on-year, driven by strong traction in retail term deposits, which increased by 29% year-on-year and 5% quarter-on-quarter. The CASA-plus retail term deposit ratio improved to 78% as of September 25, up from 68% in September 2024. The Bank is consciously reducing reliance on bulk deposits, aligning with its strategy to build a granular, low-cost retail deposit portfolio. The CD ratio, after netting off refinance borrowings, declined to 72%, indicating prudent liquidity management.

Asset quality, particularly in the JLG segment, faced stress. However, management believes the stress has peaked, with X-bucket collection efficiency in JLG improving to 98.7% in September 2025. Fresh NPA slippages have reduced significantly in H1 FY26 compared to H2 FY25, suggesting that corrective actions are taking hold. A significant green flag is the registration with CGFMU for credit guarantee coverage on eligible unsecured JLG and MBBL portfolios, effective January 17, 2025. This scheme will de-risk incremental disbursements, cushioning the book against future systemic shocks.

Strategic Outlook and Future Initiatives

Utkarsh Small Finance Bank is undergoing a comprehensive