Small finance banks have been growing at a steady pace. Their loan books, which have been growing in a CAGR range of 20% to 25%, are getting bigger every year. According to CRISIL, total advances are expected to cross Rs 2 trillion by FY26.
Importantly, growth is no longer driven only by microfinance. Loans to small businesses, housing and vehicles are now playing a larger role.
This growth has been backed by better deposit mobilisation. These banks are attracting more small savers. Savings and term deposits form a large part of their funding. This has made their balance sheets more stable and reduced dependence on large or bulk deposits.
Small finance banks are no longer just niche micro-lenders; they are maturing into systemic players. A major catalyst for the sector is the RBI’s new roadmap for SFB-to-Universal Bank transitions, which offers a path for high-performing banks like AU Small Finance Bank to shed regulatory ceilings and compete with banking giants. This transition capability, coupled with a shift toward secured retail assets, is redefining how investors value these stocks.
For investors, the timing looks favourable. Loan demand remains healthy across retail and MSME segments. Asset quality has improved after the stress seen in previous years. With interest rates relatively stable, many banks are now seeing the benefits of scale and operating leverage.
The stocks chosen for this article reflect these trends. The focus is on banks where loan and deposit growth is consistent. Profitability and asset quality have also been considered. Together, this helps highlight small finance banks where the core model is clearly working on the ground.
#1 AU Small Finance Bank: The Universal Bank Contender
AU Small Finance Bank is engaged in providing a range of banking and financial services including retail banking, wholesale banking, treasury operations and other services.
AU Small Finance Bank reported a stable performance in the second quarter of FY26 despite a weak demand environment and seasonal disruptions. Deposits grew 21% year on year to Rs 1.3 lakh crore. This was much higher than the system average. The CASA ratio stayed steady at around 29%. A fall in the cost of funds helped ease pressure on margins during the quarter.
The loan book expanded 17% year on year to about Rs 1.2 lakh crore. Growth came mainly from secured retail loans and commercial banking. Unsecured lending continued to decline and now accounts for a smaller share of total advances.
Asset quality was weaker than last year. Gross NPA stood at 2.41% up from 1.98% on a YoY basis. Net NPA was at 0.88% in Q2 FY26 whereas it was 0.75% in Q2 FY25. Credit costs showed a sequential improvement as slippages reduced.
Net interest income rose 9% to Rs 2,144 crore. Net profit for the quarter was Rs 561 crore, marginally lower than last year due to higher provisioning. The bank continues to focus on strengthening its retail franchise and progressing towards its planned transition to a universal bank, which management sees as key for long-term growth.
In the past year AU Small Finance Bank share price surged 67%.
AU Small Finance Bank 1 Year Share Price Chart
#2 Ujjivan Small Finance Bank: Dominating the Mass Market
Ujjivan Small Finance Bank is a mass market focused bank in India, catering to financially unserved and underserved segments and committed to building financial inclusion in the country. It started its operations as Ujjivan Financial Services, a Non-Banking Financial Company in 2005 with the mission to provide financial services to the ‘economically active poor’ who were not adequately served by financial institutions.
Ujjivan Small Finance Bank reported a better quarter in Q2 FY26 as business activity picked up across key segments. Deposits rose 15.1% YoY to Rs 39,211 crore. Savings account balances crossed Rs 10,000 crore during the quarter. Retail term deposits and CASA together formed a large share of total deposits. This helped reduce pressure on funding costs.
The loan book grew 14% YoY to Rs 34,588 crore. Disbursements during the quarter were the highest so far at Rs 7,932 crore. Growth came mainly from housing, MSME and vehicle loans. The share of secured loans increased to 47%, reflecting a gradual change in the lending mix. Microfinance operations showed improvement, with collections getting better in most regions.
Asset quality was broadly stable. For Q2 FY26 Gross NPA stood at 2.5% down 3 basis points YoY, while net NPA was at 0.7% up 11 basis points YoY. Slippages declined compared with earlier quarters.
Net interest income stood at Rs 922 crore. Net profit for the quarter came in at Rs 122 crore. The bank remains focused on growing secured lending and expanding its branch network over the medium term.
In the past year Ujjivan Small Finance Bank share price surged 74.7%.
Ujjivan Small Finance Bank 1 Year Share Price Chart
#3 Capital Small Finance Bank: Navigating Growth Beyond Northern India
Incorporated in 1999, Capital Small Finance Bank is India’s first Small Finance Bank.
Capital Small Finance Bank delivered a stable set of numbers in the second quarter of FY26, supported by steady deposit inflows and continued focus on secured lending. Total deposits rose about 20% from a year ago to Rs 9,317 crore. Retail deposits remained the main driver. The CASA ratio stood at 33.9%, reflecting a strong base of small and granular savers.
The loan book grew around 18% YoY to Rs 7,907 crore. Growth was led by MSME, mortgage and agriculture loans. Disbursements during the quarter increased sharply to Rs 805 crore, helped by festive demand and better rural cash flows. The bank continues to keep its lending largely secured, which has helped manage risk during a volatile period.
Asset quality remained under control despite floods in parts of northern India. Gross NPA stood at 2.7%, up from 2.61% reported in Q2 FY25. Net NPA was at 1.38% up from 1.29% reported in a year ago period.
Credit costs stayed low at 0.2%. Net interest margin was around 4%. Net interest income stood at Rs 256 crore. Net profit rose 5% year on year to Rs 35 crore. The bank added branches and is expanding gradually beyond Punjab, while maintaining a cautious growth approach.
In the past year Capital Small Finance Bank share price tumbled 13.6%.
Capital Small Finance Bank 1 Year Share Price Chart
#4 Suryoday Small Finance Bank: High Yields vs. Asset Quality Headwinds
Incorporated in 2008, Suryoday Small Finance Bank is a leading Small Finance Bank(SFB) in India. The company started offering SFB services in 2017. They serve customers in the unbanked and underbanked segments. Before SBF, the company operated as an NBFC.
Suryoday Small Finance Bank saw strong business growth in the second quarter of FY26, though earnings remained under pressure. Deposits rose 35.5% from a year earlier to Rs 11,991 crore. Retail customers drove most of the growth. The CASA ratio improved to 20.7% as savings balances increased. Digital deposits crossed Rs 1,300 crore during the period.
The loan book expanded 18.9% YoY to Rs 11,124 crore. Disbursements were higher across segments. Vikas loans, commercial vehicles and mortgages led the growth. The bank continued to move away from group-based lending towards individual loans. Secured and retail assets now form a larger share of advances.
Asset quality weakened compared with last year. Gross NPA rose to 5.9% from 2.9% reported in Q2 FY25. Net NPA rose to 3.8% from 0.8% reported in a year ago period. Slippages, however, declined from the previous quarter and collections improved.
Net interest income fell to Rs 258 crore. Total income stood at Rs 338 crore. Net profit declined to Rs 30 crore due to higher credit costs. Management expects conditions to improve gradually in the second half as repayments stabilise and secured lending picks up.
In the past year Suryoday Small Finance Bank share price is up 7.8%.
Suryoday Small Finance Bank 1 Year Share Price Chart
Comparative Analysis: Price-to-Book vs. ROE
Let us now look at the valuations of these small finance banks using the price to book ratio.
Valuations of Companies in focus
| Sr No | Company | Price to Book Value Ratio | 3 Year Median P/BV | ROE |
| 1 | AU Small Finance Banks | 4.0 | 3.9 | 14.2% |
| 2 | Ujjivan Small Finance Banks | 1.9 | 1.6 | 12.4% |
| 3 | Capital Small Finance Banks | 0.8 | 1.0 | 10.4% |
| 4 | Suryoday Small Finance Banks | 0.8 | 0.8 | 6.2% |
The numbers show that the market is clearly not valuing all players in the same way.
AU Small Finance Bank trades at about four times book value, close to its three-year average. This reflects its ability to deliver steady returns and maintain relatively stable performance.
Ujjivan Small Finance Bank is valued at around 1.9 times book, higher than its past median. This suggests investors are expecting earnings to improve over time.
Capital Small Finance Bank and Suryoday Small Finance Bank trade below book value. Their return ratios are lower and more uneven. That is why valuations remain subdued.
For investors, the question is straightforward. Can these banks improve profitability and close the gap, or are the current discounts a fair reflection of the risks involved?
Conclusion
Small finance banks are clearly expanding. Loans are growing and deposits are coming in steadily. But performance is not uniform across the sector. Some banks have grown in a more controlled manner. Their balance sheets have remained stable. Others are still dealing with weaker returns and higher stress in their loan books.
This difference shows up clearly in stock prices. Banks with stable earnings and better ROE trade at higher valuations. Banks with weaker numbers continue to trade at a discount. That gap is unlikely to close quickly. It will depend on how well each bank executes over the next few years.
For investors, this is not a space to take a broad view. It is about choosing carefully. The better opportunities lie in banks where growth is steady, risks are under control, and profitability is slowly improving, rather than those that only look cheap on the surface
Disclaimer:
Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Ekta Sonecha Desai has a passion for writing and a deep interest in the equity markets. Combined with an analytical approach, she likes to deep into the world of companies, studying their performance, and uncovering insights that bring value to her readers.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
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