Small finance banks' Q2FY26 profit plunged 55% on rising credit cost

Rise in provisions & shrinking NII weigh on bottom-line

Erosion in net interest income (NII) and rising credit costs from stressed assets hurt the small finance banks (SFBs) in the second quarter of the financial year (Q2 FY26). They made a net profit of ₹383 crore, down by over 55 per cent from ₹854 crore in Q2 FY25. 

The lenders, however, sequentially clocked a 23.9 per cent growth in net profit, compared to ₹309 crore in Q1 FY26, according to the data compiled by BS Research Bureau for listed eight SFBs. 

Their operating profit in Q2FY25 was down 15.6 per cent to ₹2,344 crore compared to the previous year and declined 12.0 per cent sequentially from ₹2,662 crore in Q1 FY26. 

Provisions and contingencies — predominantly credit cost — increased 11.8 per cent to ₹1,881 crore and declined sequentially by 17.6 per cent from ₹2,282 crore in Q1 FY26. SFBs’ NII, a key source of earnings, declined by 4.6 per cent to ₹5,543 crore in Q2 FY26 from the previous year. Sequentially, however, it rose 2.3 per cent from ₹5,420 crore in Q1 FY26, analysis showed. 

Experts said NII, the difference between interest earned and interest paid, came under pressure as banks passed on policy rate cuts to customers, especially for external-benchmark linked loans in the retail segment while repricing of deposits was still underway. The Reserve Bank of India has cut the policy repo rate by 100 basis points between February and June 2025. 

SFBs’ other income, including treasury, fees and commissions, grew 16.8 per cent to ₹1,791 crore in Q2FY26 from ₹1,533 crore the previous year. Sequentially, it declined by 13.9 per cent from ₹2,080 crore in Q1FY26. 

Asset quality was under pressure with gross nonperforming assets (NPAs), in absolute terms, rising by 51.4 per cent from ₹6,876 crore in September 2024 to ₹10,410 crore in June 2025. Sequentially, gross NPAs grew by 2.8 per cent from ₹10,128 crore in June 2025. 

Utkarsh Small Finance Bank’s gross NPAs grew more three-fold: From ₹718.74 crore in September 2024 to ₹2,276.08 crore in September 2025. Sequentially, GNPAs addition was much smaller than ₹2,196.22 crore in June 2025. Suryoday SFB’s gross NPAs more than doubled to ₹655 crore in September 2025 from ₹273 crore a year ago. However, they declined sequentially from ₹917.5 crore in June 2025. 

SFBs’ net NPAs, or bad loans that remain after provisions, increased 72 per cent to ₹3,940 crore in September 2025 from ₹2,289 crore in September 2024. However, they declined sequentially from ₹4,055 crore in June 2025.