Nov 06, 2025, News Desk — India’s small finance banks (SFBs) have grown rapidly over the past few years, serving customers that big banks often ignored. But this quarter, their results tell a different story — profits are slowing, margins are tightening, and growth is not translating into earnings.
Unlike public sector banks (PSBs), which just posted a record ₹49,456 crore combined profit in Q2 FY26, most SFBs are struggling to keep pace with rising costs and falling spreads.
The numbers make it clear — the growth engine is still running, but the fuel efficiency has dropped.
The Q2 FY26 Snapshot: Profit Under Pressure
| Bank | Net Profit (₹ crore) | YoY Change | Gross NPA (%) | Highlights |
|---|---|---|---|---|
| AU SFB | 561 | ▼ 2% | ~2.0 | Margins slipped from 6.1% to 5.5%. |
| Ujjivan SFB | 122 | ▼ 48% | 2.45 | Higher expenses cut deep into profit. |
| Jana SFB | 75 | ▼ 22% | 2.87 | Secured portfolio expanding, but margins tight. |
| Equitas SFB | 24 | ▲ 87% | 2.82 | Big rebound on cost control and recoveries. |
While PSU banks like SBI and Canara Bank have found ways to boost profits through scale, technology, and cheaper deposits, SFBs are feeling the squeeze from higher funding costs and heavy branch overheads.
Why Profits Are Slowing
The issue isn’t credit growth — that part is still strong. The problem lies in costs and spreads.
- High Deposit Rates: To attract customers, SFBs offer higher interest on savings and FDs. It helps grow deposits, but eats into margins.
- Rising Expenses: Staff, tech, and branch expansion costs are growing faster than income.
- Narrowing Margins: Net interest margins (NIMs) have fallen 30–50 bps across the board.
In contrast, PSBs now operate with cleaner balance sheets and cheaper CASA deposits. SBI, for instance, funds much of its growth through low-cost digital savings accounts — something SFBs still lack scale for.
Why Equitas Small Finance Bank Is Growing While Others Struggle
Amid this margin pressure, Equitas SFB is standing tall.
Its Q2 profit jumped 87% YoY, driven by smart cost control and a stronger mix of secured loans.
- Unlike peers chasing aggressive branch growth, Equitas focused on digital transactions (over 90% of total) and improved recoveries — adding ₹300 crore from past-due accounts.
- It’s also more balanced, with 75% of its loan book in secured MSME and retail, keeping NPAs stable and predictable.
Simply put, while others grew wider, Equitas grew wiser.
How Small Finance Banks Can Bounce Back
For SFBs, the next phase isn’t about how fast they lend — it’s about how efficiently they operate.
- Build low-cost deposit bases like PSU banks.
- Go deeper into digital lending and cost automation.
- Keep focus on asset quality, not just volume.
If they can tighten efficiency and follow a PSU-style discipline in digital and funding strategy, SFBs can turn the corner again.
EaseMoney View
Unlike the PSU turnaround driven by technology and trust, small finance banks are at the edge of transformation.
They don’t need to slow down — they just need to grow smarter.
FY27 could be the year when the most efficient, not the largest, SFBs win the race.
More Banking News –
