Utkarsh Small Finance Bank FY25 earnings: Profit plunges, NPAs spike, but deposit momentum strong

Why Did Utkarsh Small Finance Bank’s Profit Decline in FY25?

Utkarsh Small Finance Bank Limited reported a dramatic 95 percent decline in its net profit for the financial year ended March 31, 2025, registering just ₹24 crore compared to ₹498 crore in the previous year. This steep drop in profitability occurred despite strong growth in its deposit base and continued branch expansion across the country. The financial results for the fourth quarter and full year FY25 were approved by the bank’s Board of Directors on May 3, 2025. The fall in earnings was primarily attributed to a sharp rise in credit provisions, a significant spike in non-performing assets (NPAs), and changes in loan disbursement patterns following regulatory interventions in the microfinance segment. Despite achieving a modest 1 percent year-on-year increase in pre-provision operating profit to ₹1,007 crore, the bank’s bottom line was severely affected by credit stress and accounting shifts that impacted revenue recognition.

What Happened to Utkarsh Bank’s Loan Portfolio and Deposits?

Utkarsh Bank’s gross loan book stood at ₹19,666 crore as of March 31, 2025, reflecting a 7.5 percent increase from the previous year. A notable structural shift within the portfolio was the increase in secured lending, particularly housing and MSME loans, which together accounted for 43 percent of the total loan book by the end of FY25, up from 34 percent in FY24. This shift came in response to regulatory restrictions placed on unsecured lending in the microfinance sector, pushing the bank to prioritise more asset-backed credit offerings. On the liability side, the bank experienced substantial traction in deposits, with total deposits rising 23.4 percent year-on-year to ₹21,566 crore. Retail term deposits formed a major part of this growth, increasing by 33.5 percent to ₹10,635 crore. Current and Savings Account (CASA) deposits also witnessed strong momentum, rising 31.2 percent to ₹4,699 crore. The CASA ratio improved to 21.8 percent, compared to 20.5 percent a year earlier, reflecting greater deposit granularity. The bank’s credit-deposit ratio moderated to 86.8 percent from 93.7 percent in FY24, indicating improved balance sheet stability.

Why Have NPAs Spiked, and What Are the Implications?

The bank’s asset quality took a significant hit during FY25, with gross NPAs rising sharply to 9.43 percent from 2.51 percent a year earlier. Net NPAs followed a similar trajectory, climbing to 4.84 percent compared to just 0.03 percent in March 2024. This deterioration was primarily concentrated in the Joint Liability Group (JLG) loan segment, which faced severe disruption following the Reserve Bank of India‘s guardrail norms aimed at curbing borrower over-leverage in the microfinance sector. The new norms restricted credit availability, forcing the bank to shift its focus from disbursements to collections. Toward the end of FY25, the bank began to report improvements in collection efficiencies, raising hopes that NPA levels may have peaked. However, the full-year impact on earnings was considerable. The bank utilised ₹148.62 crore in floating provisions, with RBI approval, to absorb a portion of the provisioning hit, but this one-off measure could not fully offset the profitability impact.

What Changed in Accounting Policy and How Did It Impact Results?

Utkarsh Bank revised its accounting policy during the fourth quarter of FY25 regarding the recognition of loan processing fees and associated expenses. Previously, these fees and costs were amortised over the tenure of the loan, but under the new policy, they are recognised as income when due. This change, which took effect from April 1, 2024, was aimed at better aligning with prevailing industry practices and enhancing the transparency of the bank’s financial disclosures. The adjustment resulted in some front-loading of fee income during the quarter, boosting other income modestly. However, this change had a relatively limited impact on the full-year earnings, especially when compared to the more dominant influence of elevated NPAs and provisions.

How Are Analysts and Investors Responding to FY25 Results?

The muted investor response to Utkarsh Bank’s FY25 results reflects the underlying caution driven by asset quality concerns. As of May 2, 2025, the bank’s shares were trading at ₹24.80, marking a nominal 0.09 percent gain from the previous close. Despite a small uptick, the stock continues to lag broader market indices, with analysts projecting a moderate upside potential. Current consensus price targets range between ₹26 and ₹30, indicating a possible gain of up to 13 percent from present levels. However, most analysts remain wary due to the elevated NPA levels and lack of clarity on the speed of recovery in core profitability. Brokerage reports reviewed following the results suggest a prevailing ‘Hold’ recommendation, with some analysts advising clients to await further stability in the bank’s microfinance collections and visibility on asset quality improvements in Q1 and Q2 of FY26.

What Does Institutional Ownership Reveal About Market Sentiment?

The bank’s shareholding pattern for the March 2025 quarter reveals a slight decrease in institutional confidence. Promoter holding stood at 68.92 percent, down marginally from 68.93 percent in December 2024. Foreign Institutional Investors (FIIs) reduced their stake from 1.34 percent to 0.99 percent, while Domestic Institutional Investors (DIIs) brought down their holdings from 8.23 percent to 7.03 percent. The contraction in both FII and DII positions suggests concerns over the near-term earnings visibility and credit quality trends. This institutional repositioning is not unique to Utkarsh, but mirrors a broader shift seen across several small finance banks facing asset-side pressures. Nonetheless, Utkarsh’s capital position remains solid, with a capital adequacy ratio of 20.93 percent and Tier 1 capital at 17.88 percent, providing enough capital cushion to absorb further shocks should provisioning needs rise in coming quarters.

How Does Utkarsh Compare With Other Small Finance Banks?

Compared to peers in the small finance bank category such as Ujjivan Small Finance Bank and Equitas Small Finance Bank, Utkarsh’s financial performance in FY25 reflects a more severe impact from microfinance segment disruptions. While its peers have also undertaken portfolio rebalancing to include more secured retail loans, Utkarsh’s high rural exposure and deeper penetration into underbanked regions left it more vulnerable to borrower leverage-related shocks. However, the bank’s 1,000+ branch presence and strong deposit mobilisation capabilities remain competitive advantages that can support a turnaround once collections stabilise. The long-term outlook will hinge on how effectively the bank manages its portfolio transition while continuing to expand liabilities in a cost-effective manner.

What Is the Outlook for FY26?

Management commentary indicates that Utkarsh Bank expects further growth in its secured loan segments, including MSME and housing finance, where disbursement yields have already improved by 80 to 180 basis points year-on-year. As stress in the JLG segment shows signs of easing and borrower leverage levels decline, the bank anticipates a better balance between disbursements and collections in FY26. On the deposit side, the bank plans to continue expanding its retail franchise, leveraging both its digital capabilities and physical presence across 27 states and union territories. Analysts believe that the rollout of revised RBI norms for small finance banks, along with a more stable macroeconomic environment, could help support profitability recovery in FY26. However, any gains would likely be gradual, dependent on sustained collection efficiency, stable cost of funds, and a meaningful reduction in fresh slippages.

Risks, Rewards, and Investment Perspective

Utkarsh Small Finance Bank remains a significant participant in India’s financial inclusion journey, particularly in rural and semi-urban lending. The FY25 results, however, underscore the vulnerability of JLG-heavy portfolios in a tightening regulatory environment. The bank’s shift toward secured retail assets, strong capital base, and solid deposit franchise provide the structural foundation for recovery, but the current challenges around NPAs and earnings volatility cannot be ignored. Investors holding the stock may choose to stay put, awaiting clarity in Q1 FY26 results. Fresh investment may be deferred until the bank demonstrates consistent improvement in asset quality and a return to sustainable profitability metrics. Over the next few quarters, Utkarsh Bank’s performance will be closely watched as a bellwether for how well India’s SFBs can transition from microfinance-led growth to a more balanced, resilient model.