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SFBs Pivot to Secured Lending for Stability
11 May
Summary
- Small Finance Banks are prioritizing gold loans for financial stability.
- Unsecured microfinance loans continue to face high bad loan ratios.
- RBI encourages diversification, reducing PSL targets for SFBs.
In FY26, Small Finance Banks (SFBs) significantly increased their focus on secured lending, including gold loans, to improve asset quality and earnings. This strategic shift is a response to persistently high bad loan ratios within their unsecured microfinance portfolios.
The Reserve Bank of India has been actively encouraging SFBs to diversify their loan offerings to mitigate credit risks. To support this, the RBI reduced the mandatory priority sector lending target for SFBs to 60% from 75% in June of the prior year, creating space for product array expansion.
Institutions like ESAF Small Finance Bank saw their secured portfolio share rise to 61% by the end of FY26, with gold loans comprising 39.5% of their total portfolio. Jana Small Finance Bank also reported a substantial jump in its gold loan business.
Conversely, some SFBs continue to report challenges. Suryoday Small Finance Bank's joint liability group (JLG)-based micro loans contracted, with a quarter of its current JLG book becoming non-performing. Similarly, Utkarsh Small Finance Bank and Jana Small Finance Bank reported significant NPA ratios in their micro-loan segments.
