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.

Au small finance bank has announced that it has received an ESG (Environmental, Social, and Governance) rating of 73 from NSE Sustainability Ratings and Analytics Limited for the financial year 2024-25. The disclosure was made to stock exchanges on January 8, 2026, in compliance with regulatory requirements.

ESG Rating Details

The rating assessment was conducted by NSE Sustainability under their subscriber pay model, utilizing independent research methodology and information available in the public domain. Notably, the bank did not directly engage with NSE Sustainability or provide specific inputs for the rating process.

Regulatory Compliance

The announcement was made under Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The bank communicated this development to both the National Stock Exchange of India Limited and BSE Limited through an official disclosure letter.

Corporate Communication

The disclosure was signed by Manmohan Parnami, Company Secretary and Compliance Officer of AU Small Finance Bank Limited, with membership number F9999. The communication was digitally signed and timestamped on January 8, 2026, at 18:53:48 +05'30'.

This ESG rating reflects the bank's performance across environmental, social, and governance parameters as evaluated by NSE Sustainability's independent assessment framework. The rating provides stakeholders with insights into the bank's sustainability practices and corporate governance standards for the financial year 2024-25.