SFB shares fall after Bihar passes Microfinance Bill 2026; analysts weigh

Small finance bank shares fell after Bihar passed a microfinance regulation Bill requiring state approval for loan disbursals. Analysts flag regulatory risk

Small finance banks shares fall

Shares of small finance banks (SFBs) were nursing losses in Friday’s session amid reports that the Bihar state government has passed a Bill to regulate loan disbursals by microfinance institutions. 

Individually, Utkarsh Small Finance Bank share price dropped 7.16 per cent (₹13.74) in the intraday trade, Equitas Small Finance Bank (₹64.34) and Jana Small Finance Bank (₹360.10) shares fell 2.5 per cent each, Ujjivan Small Finance Bank share price slipped 5.8 per cent (₹57.95), and AU Small Finance Bank shares declined 1.6 per cent (₹957). 

By comparison, the BSE Sensex index was down 0.7 per cent at 1:15 PM.   READ LATEST STOCK MARKET UPDATES LIVE

Why are SFB shares falling today?

The decline in shares of small finance banks came after reports said the Bihar State Assembly passed The Bihar Micro Finance Institutions (Regulation of Money Lending and Prevention of Coercive Actions) Bill, 2026, on Thursday which makes it mandatory for lenders to take prior permission from the state Finance Department before disbursing loans.  As per the Bill, the rules will apply to a range of entities engaged in advancing micro-loans or small loans within Bihar, "irrespective of their place of incorporation, registration, or domicile." The includes Individuals, Partnership firms, Limited liability partnerships (LLPs), Companies, Societies, Trusts, Digital lending platforms, Mobile applications, and Any other entities or persons engaged in the business of advancing micro-loans or small loans within Bihar's territorial limits. 

The Bill also stated that microfinance companies will have to separately register with the state government to operate in Bihar, even if they have licences from the Reserve Bank of India (RBI).  

Further, under the proposed Bill, the government has appointed Director of Institutional Finance as the nodal authority. Microfinance companies, the Bill states, will be required to register with the director once they obtain a licence from the RBI. After the necessary documents are verified, the registration will be completed within 90 days.

 

Analysts await clarity on whether the rules apply to legally registered banks/NBFCs as this exemption is not present in the official Bill.   For now, the Bill has introduced fresh regulatory uncertainty in one of India's significant microcredit markets, triggering valuation concerns across listed SFB counters. 

"Mandatory state-level clearance before disbursement could slow credit flow in Bihar, impacting quarterly loan growth momentum. That apart, additional compliance layers may increase operational expenses and delay credit deployment, affecting net interest margins in the short term," said Sourav Choudhary, MD at Raghunath Capital.  READ | Sai Life soars 25% in 5 weeks, hits record high in weak market; here's why 

Investors, he said, now fear that similar legislation in other states could structurally impact the unsecured lending ecosystem. 

As per industry channel checks, small finance banks as a group manage deposits of approximately ₹3.7 trillion (as of FY25), with the segment having delivered 25-30 per cent CAGR loan growth over the past three years. However, microfinance exposure remains meaningful across several SFB balance sheets. 

Industry data further suggests that while NBFC-MFIs account for roughly 40 per cent of the microfinance portfolio, banks and SFBs together account for nearly 50 per cent, with SFBs holding an estimated 15 per cent share.  

Though the sector has consciously reduced pure unsecured microfinance exposure - from nearly 35 per cent of loan books in FY22 to about 24 per cent in FY25 - policy risk in large states like Bihar still carries earnings sensitivity. 

As per self-regulatory organisation Sa-Dhan, Bihar corners the highest microfinance loan accounts (over 22 million) with outstanding loans worth ₹57,712 crore.  "The proposed regulations, including requirement to obtain an additional registration with the state authorities (within 90 days), and prior approval from the state before initiating loan disbursements, could likely slow the pace of loan disbursement activities. This has triggered caution among investors holding stakes in SFBs with meaningful exposure to Bihar," said Vinod Nair, Head of Research, Geojit Investments Limited. 

According to analysts, banks with higher microfinance concentration or deeper geographic presence in eastern India may see near-term multiple compression.  

"While the new protections aim to bring order and accountability to the sector, they may also contribute to higher delinquency rates and margin pressures in the near term as lenders adjust to stricter compliance requirements," Nair said.

 

Stock selection and loan book diversification will likely determine relative outperformance within SFB stocks, despite near-term volatility, Choudhary noted.    READ | Data center boom sparks 'Buy' call on MTAR Tech; MOSL sees 31% upside

NBFCs to become Universal Banks?

In another development, a Business Standard report said that the Department of Financial Services (DFS) may allow non-bank finance companies (NBFCs) to convert to universal banks.

 

The proposal may consider NBFCs with asset size of ₹50,000 crore and above for potential conversion, subject to track record, profitability and asset quality thresholds.  

Currently, SFB transition norms require minimum net worth of ₹1,000 crore, listing status and GNPA/NNPA ratios of ≤3 per cent/≤1 per cent over the preceding two years.  

Analysts see the development as increasing competition in the segment.