SFBs under pressure

Shares of small finance banks (SFBs) were under pressure today, as investors reacted to a fresh state-level regulatory overhang on microcredit. Utkarsh Small Finance Bank fell 4% to Rs. 14.25, while Equitas SFB (Rs. 64.34) and Jana SFB (Rs. 360.10) were down about 2.5% each. Ujjivan SFB slipped 1.3% to Rs. 60.76, and AU SFB declined 1.2% to Rs. 961, as the selling spread across lenders with meaningful microfinance exposure.

The trigger was reports that the Bihar State Assembly has passed The Bihar Micro Finance Institutions (Regulation of Money Lending and Prevention of Coercive Actions) Bill, 2026, which introduces a fresh layer of state oversight over microcredit. The proposed framework requires lenders to seek prior permission from the state Finance Department before disbursing loans and mandates separate state registration even for entities already regulated by the RBI, with the Director of Institutional Finance as nodal authority and a stated 90-day registration timeline after verification.

The market’s concern is less about one state’s intent to curb coercive recovery and more about the precedent: if a state can insert itself into the disbursal process, microfinance moves from a centrally regulated activity to a potentially multi-regulator model. That raises execution friction, longer turnaround times, higher compliance cost, and more “stop-start” loan deployment, which is exactly where microfinance economics are most sensitive (high-frequency, low-ticket lending needs fast disbursal and tight collections to protect yields and credit cost).

Near term, the biggest impact is likely on growth optics and operating efficiency for lenders with meaningful Bihar exposure: approvals and documentation could slow credit flow, affect quarterly disbursement momentum, and push up operating costs, while any disruption to collection discipline can quickly raise perceived credit risk. This is why the reaction is sector-wide, investors are discounting policy uncertainty rather than a single-company issue, and pricing in the risk of copycat legislation in other states.

Over the medium term, the episode could accelerate an ongoing industry trend: SFBs and MFIs may tilt further toward secured/less politically sensitive lending (MSME, gold, vehicle, affordable housing) and tighten state-wise concentration limits in microcredit. For the market, the key monitorable now is whether the Bill’s final rules create a workable process (time-bound, predictable approvals) or become a discretionary gatekeeper, because the latter would justify a higher risk premium for microfinance-heavy balance sheets, while diversified SFBs should relatively outperform in such a regime.