ICRA revises its outlook on LT rating of Utkarsh Small Finance Bank to 'negative'

The agency has reaffirmed its '[ICRA] A1+' rating on the short-term bank facilities of the bank.

ICRA stated that the revision in the outlook to 'negative' considers the significant deterioration in Utkarsh Small Finance Bank's (Utkarsh) asset quality and earnings profile in FY2025 and the subdued performance expected in the near term.

The deterioration in the asset quality was primarily on account of higher slippages in the microfinance portfolio due to various factors including, but not limited to, overleveraging by borrowers, worsened credit discipline, adverse climatic conditions and other operational challenges like employee attrition.

ICRA takes note of the corrective measures being taken by the bank. Although incremental inflow to the special mention account (SMA) bucket has slowed down, the near-term performance shall remain monitorable considering the tightened guardrails for the microfinance sector. Further, the asset quality in Utkarsh's relatively newer product segments remains monitorable, given the sizeable scaleup in the last 2-3 years.

Given the deterioration in the asset quality, the bank's solvency has weakened. However, Utkarsh continues to maintain an adequate capitalisation profile. Further, it is in the process of raising Tier I equity capital up to Rs 750 crore in the near-term, which shall help it maintain a prudent capitalisation profile while providing for the deterioration in the asset quality.

ICRA also takes note of the gradual improvement in Utkarsh's deposit franchise with the share of retail deposits (retail term deposits + current account savings account (CASA)) increasing to 71% as of March 2025 from 66% as of March 2024. The share of CASA in total deposits stood at 22% as on 31 March 2025, similar to the March 2024 level.

Going forward, the bank's ability to improve the share of the relatively lower-cost CASA deposits and keep the deposit profile granular shall remain important.

Utkarsh Micro Finance received a small finance bank (SFB) licence from the Reserve Bank of India (RBI) in November 2016 and completed the conversion to an SFB in January 2017. Operating in 27 states/Union Territories (UTs), as on 31 March 2025, Utkarsh offers deposits, micro-banking loans, micro, small and medium enterprise (MSME) loans, affordable housing loans and corporate loans, among other products.

The scrip had gained 0.17% to end at Rs 23.52 on the BSE today.

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