The microfinance sector has expanded rapidly over the years, narrowing the gap between financial inclusion and formal banking. Nevertheless, the industry had recently faced challenges too. The increase in bad loans, over-leveraging, and economic shocks placed lenders under pressure.
Most microfinance institutions witnessed high delinquencies in the year gone by. The same resulted in steep valuation decline, with several banks focused on microfinance selling at record lows.
Now, the industry appears to be getting back on track. Asset quality is strengthening, lending is gaining traction, and there are early signs that profitability may be beginning to recover. This reversal makes it a good time to consider the lowest-priced microfinance banks, especially those with low price-to-book value (P/BV) ratios.
Here in this article, we will examine five of the lowest-valued microfinance banks. Let us look at them in detail.
#1 Suryoday Small Finance Bank
Formed in 2008, Suryoday Small Finance Bank is a prominent small finance bank operating in India. The organization initiated SFB service in 2017. It caters to customers of unbanked as well as underbanked classes. Prior to small finance bank, the firm was engaged as a non-banking finance industry (NBFC).
The company is at a P/BV multiple of 0.5 time now. It is well below its 1-year median PE of 1 time.
1-Year P/BV Chart of Suryoday Small Finance Bank
Suryoday Small Finance Bank’s quarter and nine months ended 31 December 2024 financial performance, shows resilience as well as continued challenges.
As of Q3 FY25, the gross NPA (GNPA) was 5.5%, up from 3.1% reported in the same quarter last year. But on adjusting for anticipated Credit Guarantee Fund for Micro Units (CGFMU) claims, the GNPA falls to 2.6%.
Likewise, net NPA (NNPA) stood at 3.1%, versus 1.4% year ago, but on adjusting for CGFMU claims, NNPA comes down to less than 0.1%.
Net interest income (NII) increased 24.6% YoY at Rs 861.5 crore, while pre-provision operating profit (PPOP) went up by 5.2% at Rs 342.6 crore. PAT, however, fell 4.1% YoY at Rs 148.7 crore.
The bank had a capital adequacy ratio (CRAR) of 26.9%, Tier I capital of 25.3%, and Tier II capital of 1.6%. This reflects robust capital buffers in the face of asset quality stress.
#2 Utkarsh Small Finance Bank
Utkarsh Small Finance Bank was incorporated in 2016 and is involved in offering banking and financial services.
Utkarsh Small Finance Bank is available at a P/BV multiple of 0.8x, which to some could appear to be a cheap valuation. It is also below its 1-year median of 1.9x.
1-Year P/BV Chart of Utkarsh Small Finance Bank
Utkarsh Small Finance Bank’s financial results for the quarter and nine months ended 31 December 2024 demonstrate both growth and setbacks. Nevertheless, asset quality parameters indicated deterioration.
GNPA increased to 6.2% as of 31 December 2024 from 3.9% as of 30 September 2024, and 3% as of 31 December 2023.
Likewise, NNPA rose to 2.5% as of 31 December 31, 2024, from 0.9% as of 30 September 2024, and 0.2% as of 31 December 2023. The PCR, including floating provisions, was 61% as of 31 December 2024.
In spite of these difficulties, the bank had a robust capital position, with a CRAR of 21.1% and Tier 1 capital of 17.9% as of 31 December 2024.
Significantly, the bank posted a net loss of Rs 168 crore in Q3 FY25, compared to a PAT of Rs 116 crore in Q3 FY24.
These numbers reflect that although USFBL has seen growth in its loan and deposit books, it is experiencing asset quality and profitability issues. The bank’s healthy capital adequacy ratio reflects an ability to absorb possible losses and fund future growth.
#3 Capital Small Finance Bank
Added in 1999, Capital Small Finance Bank is India’s first small finance bank.
Capital Small Finance Bank is trading at P/BV ratio of 0.9 times which indicates it could be undervalued. It is trading lower than its 1-year median P/BV of 1.1 times.
1-Year P/BV Chart of Capital Small Finance Bank
Capital Small Finance Bank’s performance during the quarter ended 31 December 2024, indicates consistent growth and strong financial health. The bank registered a profit after tax of Rs 34 crore for the quarter, as against Rs 29 crore in the same period last year, an increase of 18%.
With regard to asset quality, the bank had a GNPA ratio of 2.1% as of 31 December 2024, which was similar to the year before. The NNPA ratio was 1.5%, also similar to the previous year, indicating asset quality stability. The bank stands out on these parameters as it has not seen any significant decline in asset quality.
The CRAR of the bank was robust at 19.5%, which was well over regulatory norms, highlighting its robust capital position.
These numbers reflect CSFB’s steady profitability, sound asset quality, and strong capital base in the period under review.
#4 Equitas Small Finance Bank
Equitas Small Finance Bank prior to obtaining small bank license, was a wholly-owned subsidiary of Equitas Holding. The holding company commenced its operations in 2007 in the microfinance business & ventured into vehicle & housing finance in 2011. Also ventured into small and medium enterprise loan (SME) and loan again property (LAP) in 2013.
It combined with the other two subsidiaries Equitas Microfinance & Equitas Housing Finance & created a bank. Upon receiving a license in Sept 2016, the company started operations under Equitas Small Finance Bank.
The bank is available at P/BV ratio of 1.1 times, i.e., it is an attractive choice for those who look for undervalued stocks. It is available at a price lower than its 1-year median P/BV ratio of 1.6 times.
1-Year P/BV Chart of Equitas Small Finance Bank
Based on Axis Securities, Equitas Small Finance Bank has near-term pressures because of higher credit costs for its MFI business, which is expected to continue for another few quarters. The bank is now focusing more on secured assets, de-layering MFI exposure and increasing growth in micro loan against property (MLAP), auto finance, and affordable housing loan.
The brokerage has a “hold” recommendation on the stock, with a price target of Rs 72, which offers a 25.4% return from its current market price as of 16 March 2025. The brokerage thinks that the bank will also benefit from the swing in the cycle of interest rates, as virtually 80% of its book is on fixed rate.
Equitas Small Finance Bank clocked 3% as GNPA ratio as on 31 December 2024, a small jump from 2.4% in the same quarter of the last year. The NNPA ratio, however, stood improved at 1%, lower from 11% (YoY), showing effective provisioning measures.
The Return on Assets (RoA) of the bank for the period under review was 0.5% for the quarter, compared to 2% in the same period of the prior year. This deterioration in profitability has been due to higher provisions and increased credit costs.
In spite of these issues, ESFB had a high Capital Adequacy Ratio of 20.3% as of 31 December 2024, far in excess of regulatory capital levels, reflecting the bank’s solid capital base.
These numbers reflect ESFB’s attempts to control asset quality and preserve capital fortitude, despite experiencing pressures on profitability in the period covered.
#5 Jana Small Finance Bank
Established in 2006, Jana Small Finance Bank offers a variety of banking and financial services.
Jana Small Finance Bank is trading at a P/BV ratio of 1.1 times, and thus it’s a value investment idea. It’s below its 1-year median P/BV of 1.5 times.
1-Year P/BV Chart of Jana Small Finance Bank
Jana Small Finance Bank’s quarterly performance for the period ended 31 December 2024, reflects marked improvement in profitability and asset quality.
The GNPA ratio of the bank declined to 2.7% from 2.9% reported last quarter, reflecting improved quality of assets. Likewise, the NNPA ratio also improved to 0.9%, a minor decline from 1% in the last quarter, reflecting sound credit risk management.
With regard to profitability, it posted a PPOP of Rs 279 crore for the quarter ending 31 December 2025.
The CRAR of the bank was 18.4%, significantly higher than regulatory norms, reflecting a robust capital position to fund future growth.
These numbers point to bank’s sound financial well-being, underpinned by enhanced asset quality, good profitability, and sound capital base over the period covered.
Conclusion
These microfinance banks are trading at cheap valuations. Atleast as compared to their own past histories. Are these compelling enough to add these stocks to your watchlist?
The fact is profitability headwinds continue because of higher credit expenses and provisioning, though some of the banks are making a pivot toward secured lending for the sake of enhanced long-term sustainability.
A majority of these institutions are also engaging in widening their retail deposit base, which helps bring down their overall cost of funds.
While the quality of assets continues to be a concern, some banks have already acted to improve collections and recoveries. The effect of interest rate cycles will also be important, with banks holding a greater share of fixed-rate portfolios set to benefit once rates start falling.
Also, microfinance lenders are diversifying by spreading loan books, moving away from reliance on unsecured microloans, and pushing into segments such as housing finance, auto loans, and SME lending.
Despite some recent headwinds, the microfinance industry is starting to show early signs of recovery. Asset quality is improving, lending volumes are accelerating, and profitability is slowly strengthening.
As economic conditions improve, the industry may experience a rebound, placing these undervalued banks in a potentially favourable position to take advantage of future growth.
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 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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