UTKARSHBNK - UTKARSH SMALL FINANCE BANK LIMITED Share Price

Management Outlook:
Utkarsh Small Finance Bank anticipates stabilization in the microfinance sector's operating environment, with improving collection efficiency (99% by Feb 2025) and a decline in PAR levels over the next 1"“2 months. Stress in the JLG portfolio is peaking, with normalization expected by Q1 FY26. Profitability remains under pressure in Q4 FY25 but is projected to recover from FY26 as credit costs ease.

Key Points:

1. Deposits & Liquidity:

   • Deposits grew 33% YoY (retail term deposits up 41%).
   • CASA ratio stable at ~19.7%; CD ratio to decline further (92% as of Dec 2024).
   • Surplus liquidity of Rs.2,500+ crore.

2. Loan Portfolio:

   • Secured Lending Growth: Non-microbanking portfolio rose 42% YoY (MSME: +58%, Housing: +36%, CE/CV: +35%).
   • Focus on high-yield products (micro LAP at 18% yield) and secured credit cards.
   • Microfinance JLG book declined by Rs.1,200+ crore; individual loans (8% of MFI) to drive future growth.

3. Asset Quality:

   • Gross NPA increased to 6.17% (Dec 2024) due to JLG stress.
   • SMA normalization expected by Q1 FY26; floating provisions of Rs.190 crore held.

4. Strategic Initiatives:

   • Branch network expanded to 1,028 (61 added in Q3), with slower expansion planned for FY26.
   • Strengthened collections (2,000+ new hires in 9 months).
   • Reverse merger with holding company on track.

5. Regulatory & Industry Measures:

   • Adherence to guardrails (max 3"“4 lenders/borrower) and CGFMU registration for JLG credit guarantees.
   • Voter ID validation mandated for disbursements to improve credit bureau checks.

FY26 Focus: Stabilizing microfinance asset quality, scaling secured lending, and enhancing operational efficiency.

1. Has the credit cost peaked, and will provisioning reduce in future quarters?
Answer: Management indicated that provisioning in Q4 FY25 might remain similar to Q3, but a downward trend is anticipated starting Q1 FY26 as collection efficiency stabilizes and stress peaks out.

2. What precautions are taken to prevent borrower over-leveraging, and is a universal banking license being pursued?
Answer: Guardrails like limiting borrowers to 3-4 lenders and credit bureau checks are enforced. Universal banking isn't a current focus, as SFBs already offer diverse products.

3. What caused elevated slippages, and what are the provision coverage and collection trends?
Answer: Slippages stemmed from over-leveraged borrowers, heatwaves, and regulatory changes. Provision coverage is 46% (unsecured) and 38% (secured). X-bucket CE improved to 99% (Feb 2025) from 96-97% in Q3.

4. Will provisioning continue at current levels, and how will shifting to secured loans impact yields?
Answer: Gradual provisioning aligns with IRAC norms. Secured loans (e.g., micro LAP at 18% yield) will grow, balancing lower JLG yields with operational efficiency and reduced credit costs.

5. Are there regional asset quality risks, and how will CGFMU help?
Answer: Stress was localized in UP, Bihar, etc., but Karnataka's impact was minimal. CGFMU registration aims to cover unsecured JLG loans under credit guarantees.

6. Why did NPAs spike in core regions, and what are future growth strategies?
Answer: Disruptions (elections, floods) and guardrail implementation caused regional stress. Growth will focus on secured products (used vehicles, micro LAP) and gold loans (target: Rs.100 crore+ in FY26).

7. How is collection efficiency defined, and what's the reverse merger timeline?
Answer: CE measures collections against demand (99% for X-bucket). The reverse merger is on track, awaiting SEBI approval, with completion expected by Q3 FY26.

8. Were NPAs hidden pre-IPO, and how is recovery prioritized?
Answer: Stress arose post-August 2024 guardrails, not pre-IPO. Collections are prioritized via dedicated teams and ARC partnerships, with recovery benefits retained.

9. How do KYC processes ensure borrower identification?
Answer: Mandatory Aadhaar and voter ID validation (post-Jan 2025) strengthen bureau checks. Voter ID rejections added 6-8% dropouts, improving credit discipline.