Small finance banks are experiencing a revival in microfinance lending through strategic geographic diversification. Equitas Small Finance Bank reported a 70% year-on-year jump in microfinance outstanding to ₹6,019 crore at the end of June, compared to ₹3,537 crore a year ago. Similarly, Ujjivan Small Finance Bank recorded a 17% year-on-year expansion in micro loans to joint liability group members to ₹15,185 crore at the end of the first quarter of the fiscal year. According to The Economic Times, these banks are well-positioned to capitalize on the sector's revival after grappling with market stress for the past two years. The diversification strategy is enabling rapid expansion as the sector's revival offers fresh business opportunities.
The geographic diversification strategy has proven particularly effective for risk management. Utkarsh Small Finance Bank saw a 36% year-on-year contraction in its microfinance portfolio to ₹5,480 crore from ₹8,578 crore, as reported by The Economic Times. About 72% of Utkarsh's joint liability group-based micro loans are from Bihar and Uttar Pradesh, making it more concentrated in these states. In contrast, Ujjivan's lending business is spread across the top 10 states with 84% of its lending business concentrated in these regions, providing better risk distribution. As noted by PwC India's Kuntal Sur, Utkarsh is more concentrated in Uttar Pradesh and Bihar with a large microfinance portfolio and therefore trying to degrow the portfolio to reduce concentration risks.
The diversification strategy is showing positive results across the sector. ESAF Small Finance Bank reported a 16% year-on-year rise in micro loans to ₹8,733 crore at the end of June, while its gross advances increased 27.4% to ₹23,216 crore. AU Small Finance Bank, the largest in this category, saw a 25.8% increase in gross advances to ₹1.41 lakh crore but did not provide the breakdown between business verticals. Overall gross advances of Equitas Small Finance Bank increased 26.7% year-on-year to ₹47,653 crore at the end of June, according to provisional numbers. The unsecured microfinance loans yield higher than the collateral-backed retail loans, making them attractive for diversified banks. Ujjivan's gross loans, including the securitised portfolio, increased 28.9% year-on-year to ₹42,903 crore, while Utkarsh's gross loans stood at ₹19,612 crore, up 2% year-on-year.
The geographic diversification strategy is enabling small finance banks to capitalize on the sector's revival. As reported by The Economic Times, Kuntal Sur, partner and leader for risk consulting, PwC India, noted that Equitas and Ujjivan are geographically well diversified and have grown the secured book to a sizable number. With green shoots appearing in the microfinance market, these banks are increasing their share of microfinance lending, offering new business opportunities in the sector's recovery phase. The unsecured microfinance loans yield higher than the collateral-backed retail loans, making them attractive for diversified banks looking to expand their portfolio mix.
