Small finance banks see profit squeeze in Q2 as credit costs, expenses rise; hope for growth uptick

Kolkata: The small finance bank pack, which reported their quarterly earnings Friday, faced pressure on profitability either due to higher credit cost or higher expenditure. The lenders however exuded confidence of improvement in credit quality from the unsecured business from the third quarter.

AU Small Finance Bank, the biggest among them, booked a 2% lower net profit at ₹561 crore for the second quarter of the fiscal as against ₹571 crore in the year-ago period, owing to 29% higher provision as the lender faced deterioration in asset quality. AU, which is in the midst of a transition to a universal lender having received the licence in August, has a gross loan portfolio of ₹1.2 lakh crore.

Both Jana and Ujjivan, the two other universal bank aspirants, booked sharply lower net profits owing to higher expenses.

All the three lenders faced net interest margin contraction. AU's NIM for the second quarter stood at 5.5% against 6.1% earlier. The ratio for Jana and Ujjivan was sharply down 6.6% from 7.8% and 7.9% from 9.2% respectively.


AU's operating profit stood 7% higher at ₹1,210 crore for the quarter under review against ₹1,132 crore in the year ago period. However, higher provisions at ₹481 crore against ₹ 373 crore led to a fall in the net profit. The bank's net interest income was 9% higher at ₹2,144 crore while other income rose 12% at ₹713 crore.

AU saw its loan book growing 17% while the unsecured lending contracted. "The unsecured credit quality is on the cusp of recovery... portfolio growth to resume," the bank said. AU board has recommended an extension to managing director and chief executive officer Sanjay Agarwal for three years with effect from April 19, 2026 till April 18, 2029

Ujjivan reported a 48% drop in second quarter net profit at ₹122 crore as compared with ₹233 crore in the year ago period, owing not only to higher provisions but also to a fall in net interest income and higher operating expenses.

Its second quarter provision stood at ₹235 crore, 56% higher than the year-ago period's ₹151 crore. Its operating profit was down 14% at ₹395 crore against ₹461 crore a year back as rise in total expenditure outweighed rise in total income. Total income was higher at ₹1,939 crore against ₹1,820 crore while total expenditure was higher at ₹1,544 crore against ₹1,359 crore.

Its net interest income was lower at ₹922 crore against ₹944 crore while operating expenses were higher at ₹783 crore against ₹690 crore.

The bank's asset quality remained steady with gross non-performing assets ratio being at 2.45% at the end of September, a tad lower from 2.52% seen a year back. Its gross loan portfolio expanded 14% year-on-year to ₹34,588 crore with share of secured book rising to 47% from 35% a year back.

Jana's net profit stood 23% lower at ₹75 crore against ₹97 crore earlier while operating profit was 7% down at ₹279 crore as compared with ₹299 crore earlier. Provision was at ₹204 crore against ₹210 crore while gross NPA ratio improved to 2.87% at the end of September from 2.97% a year back.

The bank's total income stood at ₹1,552 crore against ₹1,342 crore while total expenditure was higher at ₹1273 crore against ₹1,043 crore. Net interest income was higher at ₹618 crore against ₹ 594 crore while other income also rose at ₹247 crore as compared with ₹176 crore.

Jana's gross loan portfolio stood at ₹31,655 crore with the share of secured assets was 73%. The management plans to raise the secured share to 80%.