Small Finance Banks Pivot To Gold Loans Amid Weak Microfinance Asset Quality

Small Finance Banks (SFBs) made a clear shift towards secured lending in FY26, with gold loans doing much of the heavy lifting. The pivot has come as bad loans from the unsecured microfinance book continue to weigh on the sector, and as the Reserve Bank of India (RBI) nudges these lenders to diversify their asset pools.

Gold loans, in particular, have been the standout product. Over the past two years, this segment has seen the fastest pickup in the financial services space. Meanwhile, the overall microfinance portfolio of SFBs has contracted, even though some of the larger players have managed to grow their loans to bottom-of-the-pyramid borrowers on a sequential basis.

A Strategic Shift To Secured Loans

ESAF Small Finance Bank's managing director K Paul Thomas summed up the thinking, saying the focus is now on building a more diversified and increasingly secured lending portfolio, which the bank sees as critical for stability and long-term growth.

ESAF's own numbers back that up. Its secured portfolio share climbed to 61% of total assets by the end of FY26, compared to 53% a year ago. The gold loan book alone jumped 55% year-on-year to ₹8,858 crore, making up 39.5% of the portfolio and edging past microloans, which now account for 39%.

Jana Small Finance Bank's gold loan book rose 141% year-on-year to ₹2,358 crore, although this came off a low base. AU Small Finance Bank, which has the largest secured share at 92.8%, is already in the process of transitioning into a universal bank. Jana, another universal bank aspirant, took its secured share to 72.6% from 69.8% a year ago.

RBI's Push For Diversification

The shift is not happening in isolation. The RBI has been actively encouraging SFBs to spread their risk across more business lines. In a notable move, the central bank sent Ujjivan Small Finance Bank's application for transition to a universal bank back to the drawing board, asking it to diversify its loan portfolio further before reapplying.

To support this, the RBI in June last year cut the mandatory priority sector lending target for SFBs to 60% of adjusted net bank credit, down from 75%. The move gave these banks more room to diversify their product offerings. Ujjivan's secured share now stands at 49.4%, up from 44% at the end of FY25.

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Microfinance Stress Still A Drag

Asset quality on the unsecured side remains a worry. Suryoday Small Finance Bank's joint liability group (JLG) micro loan book shrank to ₹1,512 crore by March-end from ₹2,062 crore a year ago, with a quarter of the current JLG book turning bad. Utkarsh Small Finance Bank's JLG portfolio contracted to ₹5,789 crore, with non-performing assets (NPAs) at 13.5%. Jana's JLG bad loan ratio stood at 16.6% on a book of ₹3,298 crore.

At an aggregate level, the SFB microfinance portfolio fell to ₹51,800 crore by March-end from ₹55,700 crore three months earlier, according to CRIF High Mark data. In contrast, bigger private banks, pure-play microfinance companies, and other non-bank lenders all grew their micro loan books over the same period.

Source:

The Economic Times