Microfinance Struggles May Impact Loan Growth and Quality for Small Finance Banks, Says Utkarsh CEO

Possible challenges in the microfinance sector could affect the loan growth and asset quality of small finance banks in the coming months, according to Govind Singh, MD and CEO of Utkarsh Small Finance Bank. He mentioned that lenders might lend less and reject more applications as they adjust to the changing market conditions.

Singh noted, “We have seen some stress in microfinance. The main issue is over-lending, but once that’s addressed, things should return to normal in about 3 to 4 months.”

Self-Regulation and New Focus

Recent guidelines from the Microfinance Institutions Network (MFIN) might cause some disruptions in the sector, Singh added. He was speaking at an event where the bank announced a co-branded credit card, new WhatsApp banking services, and brand ambassadors like Mary Kom and Sunil Chhetri.

Instead of pursuing aggressive growth in big cities like Mumbai and Bengaluru, the bank plans to focus on secured credit cards. This product allows customers to take loans from ₹90,000 to ₹9 lakh against fixed deposits with the bank, particularly targeting underserved regions like Bihar and Jharkhand.

“We want to offer credit cards to more people, especially those who are new to credit,” Singh explained. He anticipates this product will take about 3 to 6 months to gain traction and help with deposit mobilization over the next few years.

Interest Rate Normalization

Regarding the Reserve Bank of India’s comments on high-interest rates charged by small finance banks, Singh stated that his bank is working to normalize rates. They now offer different rates based on a customer’s repayment history rather than a flat rate for everyone.

He believes interest rates will decrease as lending rates ease and the central bank cuts the repo rate. Singh highlighted that the bank is shifting its focus from large-value deposits to retail term deposits, allowing for cross-selling of other financial products like loans, insurance, and mutual funds.

Currently, large deposits make up about 33% of the bank’s total deposits, but this share is declining. Singh noted that higher yields from lending, such as loans against property, are helping to counterbalance the impact of elevated deposit rates and support overall profitability.