Utkarsh Small Finance Bank , a prominent player in the microfinance sector, reported a net loss of Rs 348 crore for the second quarter of fiscal year 2026. The bank's performance was significantly impacted by regulatory changes and lingering stress in its microfinance portfolio.

Key Highlights

Regulatory Impact and Portfolio Stress

The implementation of MFIN Guardrail 2.0, effective from April 1, 2025, has introduced significant changes in the microfinance lending landscape. This regulatory shift, which limits borrower-level leverage to a maximum of 3 lenders, has led to slower-than-expected recovery in collection sentiment and elevated overdue accounts.

Govind Singh, Managing Director and CEO of Utkarsh Small Finance Bank, stated, "The quarter was marked by a deliberate shift in strategy – balancing caution with forward momentum. Our focus has remained on strengthening the fundamentals, even as we navigate through transitional headwinds that have impacted certain segments of our portfolio."

Portfolio Diversification and Risk Management

Despite challenges in the Joint Liability Group (JLG) segment, the bank has made significant strides in diversifying its portfolio:

• The micro-banking business loan (MBBL) portfolio grew by 39.00% year-on-year, now constituting 13.00% of the micro-banking loan book.
• Non-JLG lending businesses maintained healthy momentum, growing by 30.00% year-on-year and 4.00% quarter-on-quarter.
• The MSME loan book expanded by 33.00% year-on-year to Rs 4,164.00 crores.
• Housing loans grew by 21.00% year-on-year to Rs 947.00 crore.

Capital Raising and Future Outlook

To strengthen its capital base, Utkarsh Small Finance Bank successfully raised Rs 950.00 crore through a rights issue in November 2025. This capital infusion is expected to support the bank's growth plans for the next 24 months.

Looking ahead, the bank aims to achieve a loan book growth of around 25.00% over the next 2-3 years, with a focus on maintaining a well-diversified portfolio. The management expects the secured lending share to exceed 50.00% of the total loan book.

Recovery Trajectory

While Q3 FY26 may still face some challenges, the bank anticipates a gradual recovery starting from Q4 FY26. Govind Singh emphasized, "We expect asset quality to improve meaningfully from quarter 3 onwards. Pre-qualified loans to existing customers with no delinquencies are streamlining field operations, and exploring innovations across products will enable us to gain a higher wallet share of our existing customers with strong repayment track records."

The bank targets a net interest margin (NIM) of around 8.50% and aims to deliver a return on equity of about 15.00% by FY28, supported by efficient operations and moderated growth.

As Utkarsh Small Finance Bank navigates through this transitional phase, investors and stakeholders will be closely watching its performance in the coming quarters for signs of sustained recovery and growth.

Utkarsh Small Finance Bank has successfully concluded its rights issue, raising approximately Rs. 949.08 crores through the allotment of 67,79,13,784 equity shares. The bank's Capital Structuring and Fund Raise Committee approved the allotment on November 05, 2025, marking a significant milestone in the bank's capital raising efforts.

Key Details of the Rights Issue

Impact on Share Capital

The successful completion of the rights issue has led to a substantial increase in Utkarsh Small Finance Bank's paid-up share capital. The changes in the bank's capital structure are as follows:

This rights issue represents a significant capital infusion for Utkarsh Small Finance Bank, potentially strengthening its financial position and supporting future growth initiatives. The additional capital may enable the bank to expand its operations, improve its lending capacity, and enhance its overall market presence in the small finance banking sector.

Investors and market observers may want to monitor how Utkarsh Small Finance Bank utilizes this newly raised capital and its impact on the bank's financial performance in the coming quarters.