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

The Bihar government's nod to regulate loan disbursals by microfinance institutions (MFIs) in the state triggered a selloff in shares of small finance banks (SFBs) on Friday.

 

Shares of Utkarsh SFB, Equitas SFB, Jana SFB, Ujjivan SFB, and AU SFB dropped in the range of 1.6-7.16 per cent intraday, before settling up to 6.5 per cent lower on the BSE. Among non-banking financial companies (NBFCs) with high microfinance exposure, shares of CreditAccess Grameen, L&T Finance, and Fusion Finance crashed up to 7.7 per cent. 

By comparison, the BSE Sensex index closed 1.17 per cent lower at 81,287.19. 

The decline in shares of SFBs came after the Bihar Assembly passed The Bihar Micro Finance Institutions (Regulation of Money Lending and Prevention of Coercive Actions) Bill, 2026, on Thursday, which made it mandatory for lenders to take prior permission from the state finance department before disbursing loans. 

 

The Bill states that 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”. These include 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 within Bihar's territorial limits.

 

Though analysts await clarity on whether the rules apply to legally registered banks/NBFCs — as this exemption is not explicitly mentioned in the Bill — they believe the ambiguity has introduced fresh regulatory overhang in one of India's significant microcredit markets.

 

That apart, 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). For this, the government will appoint a “Director of Institutional Finance” as the nodal authority. Microfinance companies will have to register with the director once they obtain a licence from the RBI. After the necessary documents are verified, the registration is to be completed within 90 days.

 

"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 (NIMs) in the short term," said Sourav Choudhary, managing director at Raghunath Capital. Investors, he said, fear a domino effect in other states.

 

SFBs, cumulatively, managed pan-Indian deposits worth ₹3.7 trillion at the end of financial year 2024-25 (FY25), with the segment having delivered 25-30 per cent CAGR (compound annual growth rate) loan growth over the past three years.

 

Separately, NBFC-MFIs accounted for roughly 40 per cent of the microfinance portfolio while banks and SFBs together accounted for nearly 50 per cent of micro-loans. Of this, SFBs held an estimated 15 per cent share.

 

Analysts pointed out that though the financial sector has reduced aggregate 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 carries earnings sensitivity.

 

Notably, Bihar has the highest microfinance loan accounts (over 22 million), with outstanding loans worth ₹57,712 crore, according to self-regulatory organisation Sa-Dhan.

 

Utkarsh SFB has an exposure of 45 per cent of its total assets under management (AUM) toward Bihar; L&T Finance has 17 per cent, Fusion Finance 16.7 per cent, Ujjivan SFB 11 per cent, and CreditAccess Grameen has 4.6 per cent.

 

"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.

 

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, he added.

 

In this backdrop, analysts noted that stock selection and loan book diversification will likely determine relative outperformance within SFB stocks, despite near-term volatility.