Domestic institutional investors have demonstrated strong confidence in AU Small Finance Bank by significantly increasing their stake from 20.13% to 31.91% between September 2024 and September 2025. This substantial increase of over 11 percentage points signals growing institutional conviction in the bank's long-term growth prospects and operational performance.

Shareholding Structure and Institutional Confidence

As of September 2025, AU Small Finance Bank's shareholding structure reflects balanced institutional participation across different investor categories:

The sharp increase in DII holdings from 20.13% to 31.91% over the year demonstrates sustained confidence from domestic long-term institutional investors in the company's strategic direction and financial performance.

Strong Financial Performance and Growth Metrics

The bank has delivered impressive financial results that justify institutional confidence. Total deposits reached ₹1,38,420 crore as of December 2025, representing a robust 23.30% year-on-year growth from ₹1,12,260 crore in December 2024.

Asset Quality and Risk Management

AU Small Finance Bank has maintained a conservative and well-secured loan portfolio structure. The secured loan book accounts for approximately 92% of the gross loan portfolio, growing 5% quarter-on-quarter and 22% year-on-year. This asset-backed approach has contributed to improved asset quality metrics.

Operational performance showed improvement during Q2FY26, with the bank reporting a 12% sequential decline in slippages. Credit costs eased to 30 basis points from 34 basis points in Q1FY26, while net interest margin improved by 5 basis points, supported by a 25 basis point reduction in cost of funds.

Universal Banking Approval Catalyst

A major catalyst behind rising institutional interest is the RBI's in-principle approval for AU Small Finance Bank to transition into a universal bank. This milestone positions the bank as the first small finance bank in over a decade to receive such approval, opening opportunities for:

• Corporate lending expansion
• Liability base diversification
• Enhanced product portfolio
• Improved credibility among large institutional investors

Balance Sheet Strength and Scale

AU Small Finance Bank has achieved significant scale milestones, crossing the ₹1 lakh crore mark in loans, assets, and deposits. The CASA ratio stood at 28.90% as of December 2025, with CASA deposits of ₹39,950 crore reflecting 16.10% year-on-year growth.

The bank maintains confidence in its operational targets, aiming to keep the cost-to-income ratio below 60% and cost-to-opex ratio under approximately 4.30%. Management expects credit costs for the full year to align with guidance of around 1%.

Market Performance

The stock has delivered strong returns across multiple timeframes, with a 3-month return of 29.41%, 6-month return of 23.92%, and 1-year return of 75.02%. The bank trades at ₹999 per equity share with a market capitalization of ₹74,676.98 crore, positioning it as the best performer in Bank Nifty for 2025.

Small finance banks are implementing strategic risk management overhauls following significant asset quality stress from the microfinance crisis. These institutions are prioritizing secured lending growth and expanding credit guarantee coverage to stabilize their portfolios and prevent further deterioration in asset quality.

Current Portfolio Composition and Challenges

The sector faces substantial asset quality pressures, with unsecured lending forming a significant portion of their portfolios. Key banks show varying levels of exposure to unsecured lending:

Utkarsh reported the highest bad loan ratio at 12.40% among its peers at the end of September. The small finance bank sector collectively experienced approximately 22% of their unsecured microfinance portfolio turning bad as of March last year, when sectoral NPAs including write-off accounts stood around 16%.

Strategic Portfolio Restructuring Plans

Banks are establishing clear timelines for reducing unsecured lending exposure. ESAF targets bringing down its unsecured loan share to 30% of total portfolio by March 2027, focusing on gold loans, mortgages, and mobility loans. Suryoday aims to reduce unsecured lending to 35-40% by FY27, while Ujjivan has adopted a longer-term approach under its five-year business strategy to achieve 30-35% unsecured share by FY30.

Credit Guarantee Coverage Expansion

Banks are leveraging the Credit Guarantee Fund for Micro Units (CGFMU) scheme to enhance portfolio stability. Jana Small Finance Bank aims to bring 70% of its unsecured loans under guarantee coverage by the end of this fiscal year. Suryoday has emerged as an early adopter, maintaining approximately 98% of its microfinance portfolio under the CGFMU scheme.

Regulatory Support and Diversification

The Reserve Bank of India's decision to reduce priority sector lending targets for small finance banks from 75% to 60% of adjusted net bank credit provides enhanced flexibility for portfolio diversification. This regulatory change enables these institutions to expand beyond microfinance into secured lending products including vehicle loans, affordable housing loans, and gold loans.

Risk Management Focus Areas

The banks' risk-first strategy emphasizes:

• Expanding collateralized lending to small businesses
• Growing secured product offerings including gold loans and mortgages
• Maximizing credit guarantee coverage for new microfinance loans
• Reducing overall dependence on unsecured lending

Utkarsh specifically targets achieving a secured lending share exceeding 50% within the next two to three years. The majority of new loans across the sector are now being covered under credit guarantee programs managed by the National Credit Guarantee Trustee Company, helping stabilize asset quality metrics and reduce risk exposure.