KOCHI: Nearly a decade after their inception to bring banking to the unbanked, India’s Small Finance Banks (SFBs) are facing an existential question.
As they grapple with mounting bad loans from their core micro-lending portfolios, these small finance banks are increasingly pivoting away from the very mandate for which they were established.
This strategic shift, driven by a struggle for survival, raises a critical debate: Are SFBs quietly abandoning their founding mission of financial inclusion in favour of safer, more traditional banking models?
The financial numbers from across the sector suggest the answer may be yes.
Utkarsh Small Finance Bank
The trend is starkly visible across the sector. Utkarsh Small Finance Bank, for instance, has seen the share of its non-microfinance portfolio increase to 53 per cent as on June 30, 2025, according to a recent ICRA report. \
This strategic pivot was driven by “stress witnessed in the microfinance portfolio,” leading to a dramatic increase in its microfinance gross NPA to 20.8 per cent.
ESAF SFB
Similarly, as we have seen with ESAF Small Finance Bank, the micro-loan book has been contained to about 46 per cent of its portfolio as it grapples with a high Gross NPA.
This is not an isolated phenomenon. Equitas Small Finance Bank has also been consciously de-risking its balance sheet.
A CRISIL rating rationale notes that its microfinance portfolio declined by a sharp 28 perr cent during fiscal 2025. The bank’s management is “focusing on de-risking its balance sheet by shifting its focus to the secured portfolio,” such as Small Business Loans, affordable housing, and vehicle loans.
Suryoday Small Finance Bank
Suryoday Small Finance Bank has also followed a similar path, with its “Inclusive Finance” portfolio (which includes micro-lending) shrinking to 48 per cent of its total assets as of June 30, 2025, from 58 per cent a year prior, according to its investor presentation.
While this pivot may seem to compromise the SFBs’ founding principles, the banks and regulators argue it is a necessary move for survival.
This strategic de-risking is a direct response to the crippling asset quality issues and high credit costs that micro-lending has brought on.
The RBI’s recent relaxation of Priority Sector Lending (PSL) norms for SFBs, lowering the target from 75 per cent to 60 per cent, can be seen as an acknowledgment that these banks need greater flexibility to diversify and strengthen their balance sheets.
For many, the ability to shift their focus to a more sustainable, diversified portfolio is not a betrayal of their mandate, but a prudent measure to ensure their long-term viability and protect depositors’ interests.
The core question remains: can these banks truly fulfill their purpose of financial inclusion if they abandon the very segment they were created to serve?
