Jana Small Finance Bank Navigates MFI Headwinds While Planning for Universal Bank Transition

Jana Small Finance Bank (Jana SFB) is undergoing a strategic transformation, balancing the lingering stress in the microfinance institution (MFI) segment with its long-term ambition of becoming a universal bank. In a recent statement, Ajay Kanwal, the Managing Director and CEO, laid out the bank’s vision and the cautious approach it is adopting to ensure both growth and stability.

Microfinance Recovery Still in Progress

Kanwal acknowledged that while the peak of the MFI stress may be behind, the segment is not yet back to pre-crisis levels. “The peak of the worst is over, but we are not back to MFI after one year of stress,” he said. He was referring to the challenges faced by borrowers, particularly after events like the Karnataka ordinance, which led to fresh slippages in loan repayment behavior.

These disruptions underscore the sensitivity of the MFI customer base to external regulatory or socio-economic shocks. Consequently, Jana SFB has adopted a more defensive posture in managing its unsecured loan book.

Shift to Secured Lending and Risk Mitigation

In response to evolving risks, Jana has chosen to bring its unsecured lending portfolio under government-backed guarantee schemes. This is a proactive move to eliminate event-based risks that can otherwise destabilize earnings and asset quality.

“We thought to take away any amount of event risk... best that we will get the unsecured business under the guarantee programme,” Kanwal explained.

Furthermore, the bank has been working systematically to transform from a pure unsecured MFI player to a well-diversified bank. It now targets a loan book mix of 80:20 between secured and unsecured loans, respectively.

This strategy is part of a long-term vision to build a robust, sustainable, and resilient financial institution capable of weathering macroeconomic shocks and regulatory shifts.

Impact on Net Interest Margins (NIMs)

With the pivot toward secured lending, a slight reduction in net interest margins (NIMs) is expected. Kanwal projected a dip of about 10 basis points due to this transition. This is a natural trade-off in favor of risk-adjusted stability, as secured lending typically carries lower yields but reduced risk.

Additionally, future interest rate cuts, if implemented by the Reserve Bank of India (RBI), could lead to a further minor compression in NIMs. Despite this, the bank appears committed to the strategy for the long-term structural benefits it provides.

Plans to Become a Universal Bank

One of the most significant developments at Jana SFB is its formal application to the RBI for a universal bank license. This move marks a milestone in its seven-year journey since inception.

“It took us seven years to meet all the norms set forth by the RBI,” Kanwal stated, expressing optimism about the transition.

If approved, the universal bank status would bring several advantages:

• Greater flexibility in deposit mobilization

• Increased brand trust and customer reach

• Stronger CASA (Current Account Savings Account) profile

• Lower cost of funds

• Ability to cater to larger MSME clients who prefer full-service banking

This would position Jana SFB as a serious contender in the mid-tier banking space, allowing it to compete more effectively with established players.

Serving the MSME Segment

As it moves toward universal status, Jana SFB is intensifying its focus on the MSME sector, which is often underserved by traditional banks. With the ability to offer secured loans, longer tenures, and relationship-based banking, the bank aims to bridge the gap between micro-lending and formal commercial banking.

MSMEs are a vital part of the Indian economy, and access to credit is a major barrier to their growth. Jana SFB’s evolving model—from microfinance roots to comprehensive MSME services—aligns well with the government’s vision of supporting small and mid-sized enterprises.

RBI’s Growth-Oriented Policy Support

The broader economic environment is also turning favorable for Jana’s strategy. The RBI’s policy stance, with its focus on liquidity infusion and potential rate cuts, is likely to boost credit demand and improve borrower quality.

Kanwal described the policy environment as “growth-oriented”, noting that it could lead to increased loan demand across sectors, especially as rates ease.

This macro support is vital as the bank transitions its business model, recalibrates its asset base, and positions itself for broader lending.

Jana Small Finance Bank’s Market Performance

Despite the promising strategic direction, Jana Small Finance Bank’s shares have declined by nearly 23% over the past year. The market seems to be factoring in the short-term uncertainties, particularly surrounding NIM compression, asset quality, and regulatory approval for universal bank conversion.

The bank’s current market capitalisation stands at ₹5,647.10 crore, reflecting its mid-cap status and potential for re-rating upon successful execution of its long-term strategy.

Balancing Risk, Growth, and Transformation

Jana SFB’s journey is emblematic of the transformation path many small finance banks are now attempting—moving from niche financial inclusion mandates to mainstream banking platforms.

Its strategy rests on a few key pillars:

• De-risking via secured lending

• Digital and relationship-led MSME banking

• Lower cost of funds through CASA build-up

• Expanding regulatory scope as a universal bank

The shift is not without trade-offs, especially in profit margins and operational scalability, but the long-term outlook remains optimistic, especially if macro conditions remain supportive.

Conclusion: A Strategic Inflection Point

Jana Small Finance Bank is at a critical inflection point. With microfinance risk being managed more cautiously, and a clear strategy to reduce exposure to unsecured lending, the bank is now positioning itself for next-level growth.

Its universal bank application could be a game-changer, enabling stronger deposit growth, lower borrowing costs, and wider product offerings.

As the banking landscape evolves and RBI policies encourage credit expansion, Jana’s structured approach could place it in a strong competitive position among emerging banks in India.

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