Utkarsh Small Finance Bank posts Rs 168cr loss in Q3 FY25 – Can it bounce back?

Utkarsh Small Finance Bank Limited has released its financial results for the third quarter (Q3) and nine-month period ending December 31, 2024, highlighting strong deposit growth and an expanding secured loan portfolio. However, the bank also reported a sharp increase in non-performing assets (NPAs) and a net loss of ₹168 crore for Q3 FY25. The results reflect ongoing challenges in the microfinance sector, particularly in the wake of tightened regulatory norms that have impacted credit supply and disbursement trends.

How Has Utkarsh Small Finance Bank’s Loan Portfolio Evolved?

Utkarsh Small Finance Bank’s loan portfolio expanded by 16.2% year-on-year (YoY), reaching ₹19,057 crore as of December 31, 2024. A notable shift in its lending strategy is evident, with secured loans now accounting for 41% of the total loan book, a significant rise from 34% in March 2024. This strategic shift toward secured lending reflects the bank’s efforts to mitigate risks associated with unsecured microfinance lending, which has been under pressure due to regulatory changes and borrower stress.

To enhance portfolio stability, the bank has optimized loan disbursements in housing and Micro, Small, and Medium Enterprise (MSME) segments, increasing yields by 50-130 basis points compared to the previous year. The focus on secured lending growth aligns with the bank’s long-term vision of reducing exposure to volatile microfinance loans while maintaining profitability in key lending segments.

Why Are Deposits Growing Despite Sector Challenges?

Deposits surged by 33.5% YoY, reaching ₹20,172 crore as of December 31, 2024. The bank’s retail term deposits (RTD) saw a particularly strong increase, growing by 40.6% YoY. This growth highlights continued consumer confidence and the bank’s ability to attract granular retail deposits, which provide a more stable source of funding compared to bulk deposits.

The bank’s credit-to-deposit (CD) ratio improved to 91.9%, down from 99.2% in December 2023, demonstrating better liquidity management. The emphasis on strengthening the deposit base aligns with the bank’s strategic goal of reducing reliance on high-cost institutional deposits. The consistent increase in retail deposits also reflects Utkarsh Small Finance Bank’s efforts to expand its customer base, particularly in semi-urban and rural markets.

What Led to the Rise in NPAs and a Net Loss?

One of the key concerns in the financial report is the surge in NPAs. The gross NPA ratio climbed to 6.17%, up from 3.88% in September 2024 and 3.04% in December 2023. Net NPAs also increased significantly to 2.50% from 0.89% in the previous quarter. The provision coverage ratio (PCR), including floating provisions, stood at 61%, reflecting the bank’s proactive approach in maintaining adequate buffers against potential loan defaults.

The bank reported a net loss of ₹168 crore in Q3 FY25, a significant reversal from the ₹116 crore profit recorded in Q3 FY24. For the nine-month period ending December 31, 2024, profit after tax (PAT) stood at ₹21 crore, down sharply from ₹338 crore in the same period last year. The increase in NPAs and the decline in profitability are primarily attributed to the impact of the “guard rail” regulations, which have tightened lending norms for micro-borrowers. These measures, while designed to strengthen the microfinance sector, have led to higher provisioning requirements and a slowdown in loan disbursements.

Despite short-term challenges, the bank views these regulatory changes as beneficial in the long run. The expectation is that as the sector adjusts to these norms, asset quality will stabilize, and credit demand will recover in the coming quarters.

What Is Driving the Bank’s Expansion Strategy?

Utkarsh Small Finance Bank continues to expand its presence across India, adding 140 new branches in the first nine months of FY25. As of December 31, 2024, the bank operates a network of 1,028 branches across 26 states and Union Territories (UTs). This expansion reflects the bank’s commitment to increasing financial accessibility, particularly in underserved rural and semi-urban regions.

Govind Singh, Managing Director and CEO of Utkarsh Small Finance Bank, acknowledged the difficulties in the microfinance lending landscape but expressed optimism about future improvements. He noted that while credit supply constraints have impacted disbursements, the regulatory measures are a structurally positive step for the industry. According to Singh, collection efficiency is showing signs of stabilization, and stress levels appear to be peaking. He expects collection efficiency to improve in the coming quarters, helping the bank regain financial momentum.

How Is Utkarsh Small Finance Bank Positioning for Future Growth?

Despite the near-term pressures, Utkarsh Small Finance Bank remains well-capitalized, with a Capital to Risk (Weighted) Assets Ratio (CRAR) of 21.10% and a Tier 1 capital ratio of 17.94%. These figures indicate that the bank has a solid financial foundation to support its growth initiatives and navigate the evolving regulatory landscape.

Looking ahead, the bank expects further growth in secured lending, particularly in housing and MSME loans, which have demonstrated better risk-adjusted returns. Loan collection efficiency is expected to improve, reducing the need for high provisioning in the upcoming quarters. The bank also aims to continue its expansion strategy by opening additional branches and enhancing its digital banking offerings, including mobile banking, online account onboarding, and improved digital payment solutions.

The bank’s long-term strategy remains focused on strengthening its retail deposit franchise, expanding its secured lending portfolio, and improving operational efficiencies. By balancing risk management with business expansion, Utkarsh Small Finance Bank is positioning itself for sustainable growth in an evolving banking environment.