The MSME financier that delivered 40% stock returns: Can SBFC keep winning?

Indian Express

13 hours ago

In India, millions of small business owners run shops, workshops, and tiny factories that keep local economies alive. These entrepreneurs often need quick, reliable funding to add inventory before a festival, fix a shopfront, or expand to a nearby town.
But getting a loan from a big bank is rarely easy. Strict paperwork, rigid rules, and long approval times leave many of them stuck.
This funding gap created a huge opportunity. SBFC Finance saw it early and built a business focused on these small business owners, offering simple, secured loans against property or gold.
In the past year, SBFC's share price jumped 46%. With over Rs 8,700 crore in assets under management and a growing branch network, SBFC now stands out as a growth-focused lender.
The big question is clear: can this careful, grassroots approach keep delivering, or is the easy growth already done?
Understanding SBFC's business model
At its core, SBFC Finance focuses on secured loans to micro, small, and medium enterprises (MSMEs). It works with small business owners in the Rs 5 lakh to Rs 30 lakh loan segment.
This segment is estimated to have a market size of Rs 3.2 lakh crore and is growing at about 24% every year. By focusing on this niche, SBFC caters to traders, shopkeepers, and service providers in smaller cities who often lack formal income proof but have reliable local businesses.
Strong growth in AUM and profits
In FY25, SBFC's assets under management (AUM) grew 28% year-on-year to Rs 8,747 crore, up from Rs 6,822 crore in FY24.
The secured MSME loan book, which forms approximately 83% of the total AUM, increased by 27% to Rs 7,249 crore. The gold loan segment makes up around 15-17% of the portfolio, offering another steady source of growth.
Total income rose 28% to Rs 1,306 crore in FY25, led by higher interest income. Profit after tax grew even faster at 46%, reaching Rs 345 crore. Pre-provisioning operating profit also saw a strong 47% jump to Rs 532 crore.
Efficiency and cost control
SBFC's cost-to-AUM ratio improved from 5.34% in FY24 to 4.65% in FY25, showing better operating efficiency as the company scaled. The steady expansion of branches did not push up costs disproportionately. Instead, better productivity across branches helped maintain a lean cost structure.
The company also maintained stable yields at around 17.8% while keeping the cost of funds at about 9.3%, resulting in a healthy spread of 8.4%.
Controlled credit risk
On the asset quality front, SBFC kept its gross non-performing assets (GNPA) ratio nearly stable at 2.74% in FY25, compared to 2.43% the year before. Net NPA was 1.51%, supported by a provision coverage ratio (PCR) of 45.7%.
Moreover, over 85% of MSME borrowers had credit scores above 700. All loans had co-borrowers, usually a spouse or parent, which adds an extra layer of repayment responsibility and helps lower default risk.
Branch expansion
SBFC added 22 branches in FY25, taking its total count to 205 across 164 cities. This expansion helped the company reach deeper into Tier 2 and Tier 3 markets, where demand for small business credit remains strong. Despite this growth, SBFC kept operating expenses flat on a quarterly basis, signaling effective cost discipline.
The average ticket size stayed around Rs 9.5 lakh for MSME loans and under Rs 1 lakh for gold loans. This ensures a granular, diversified loan book and avoids excessive exposure to any single large borrower.
Why SBFC's strategy makes sense
In banking and lending, the ultimate goal is to balance yield (the return you get from loans) against risk (the chance of losing money due to defaults). SBFC's focus on secured lending helps it achieve an attractive risk-adjusted return.
By keeping the entire book secured, whether by property or gold, SBFC reduces the probability of loss given default (LGD). The loan-to-value (LTV) ratios, at about 43% for property-backed MSME loans and 62% for gold loans, provide substantial collateral buffers. Even if a borrower defaults, the company can typically recover most, if not all, of the principal by liquidating the collateral.
In contrast, unsecured lenders face higher LGD and must rely heavily on borrower cash flows and good behaviour, which can be unpredictable.
The secured structure directly lowers credit costs, as evident in SBFC's FY25 credit cost of around 0.97%, well within its guided range of 1% plus or minus 10 basis points.
Healthy spread and strong profitability
For any lender, the spread, the difference between the yield on loans and the cost of funds, is a key profit driver.
In FY25, SBFC maintained a spread of about 8.4% (17.8% average yield minus 9.3% average cost of funds).
This spread is higher than what many traditional banks or large housing finance companies achieve, often because they operate in lower-yield segments or face stiff pricing competition. SBFC's ability to hold this spread reflects its strong pricing power in the MSME secured segment, where formal credit options are limited and borrowers value quick, collateral-backed access.
This healthy spread flowed directly into operating metrics: SBFC's return on average AUM was 4.5%, and return on tangible equity improved to 13.1% by the end of FY25. These figures suggest that the business model generates growth and converts it efficiently into shareholder value.
Conservative underwriting without compromising growth
More than 85% of MSME borrowers have credit scores above 700, an indicator that the company continues to prioritise borrower quality even as it scales.
Further, every loan requires a co-borrower, often a spouse or close family member, which strengthens repayment incentives. This structure ensures moral pressure at the household level, which is a powerful risk mitigant in the Indian context where family reputation matters.
Moreover, by focusing on small ticket sizes (average MSME loan of Rs 9.5 lakh and gold loans under Rs 1 lakh), SBFC avoids excessive exposure to any single borrower. This granular approach reduces concentration risk and protects the overall loan book from idiosyncratic shocks.
Operating leverage playing out
SBFC entered the public markets with a fully built-out cost structure, covering 16 states and 2 union territories. This upfront investment means that much of its fixed operational cost was already absorbed, allowing new branches and AUM growth to feed directly into profitability.
The result? The cost-to-AUM ratio fell from 5.34% in FY24 to 4.65% in FY25, while operating expenses remained largely flat quarter-on-quarter despite branch additions.
As the loan book grows, each incremental rupee of revenue carries a higher margin, thanks to this operating leverage. This trend is essential for investors seeking sustainable profit growth beyond just headline AUM expansion.
Collections and asset quality control
In FY25, many lenders across India, especially those with heavy exposure to unsecured personal loans or small-ticket consumer credit, saw a noticeable rise in non-performing assets (NPAs). Rising household leverage, local economic stress in certain states, and stricter regulatory scrutiny led to higher delinquencies. Several NBFCs and fintech lenders reported a sharp uptick in early-stage defaults (1+ DPD) and final slippages into GNPA buckets.
Against this backdrop, SBFC's asset quality performance stands out.
Despite expanding its loan book by 28% year-on-year, SBFC kept its gross NPA ratio largely stable at 2.74%, only slightly higher than 2.43% in the previous year. The net NPA figure also stayed comfortable at 1.51%, supported by an improved provision coverage ratio of 45.7%.
The company combines technology tools like daily delinquency tracking, automated reminders, and account aggregator data with a robust in-person follow-up system. If a payment is missed, the process moves quickly from calls to field visits to legal escalation when required.
While there was a slight increase in the 1+ day past due bucket (in part due to temporary stress in regions like Karnataka), management indicated these early delinquencies were being resolved and did not materially flow into final NPAs.
Diversified funding and strengthening the balance sheet
On the liability side, SBFC has a diversified borrowing mix, including public and private sector banks, financial institutions, and non-convertible debentures. Its improved credit ratings (AA–stable) and inclusion in the MSCI Global Small Cap Index signal enhanced credibility and investor confidence.
A strong capital adequacy ratio (CRAR) of 36.1% gives SBFC a comfortable cushion to support future growth without immediate need for dilution or excessive leverage.
Technology as a scalable enabler
Banking parlance often refers to the 'cost-to-serve' metric, the expense involved in originating, processing, and servicing a loan. By heavily investing in technology (like APIs, account aggregator integration, and fully digital gold loans), SBFC has reduced its cost-to-serve and improved turnaround times.
For example, the fully digital gold loan process allows disbursal to be completed within minutes, reducing manual intervention and human error, while freeing up staff capacity. Over time, these efficiencies contribute directly to margin expansion and enable rapid scaling without proportionate headcount or cost increases.
Valuation: stretch or opportunity?
On one hand, the 40% stock rally has pushed valuation multiples up, suggesting that the easy gains may be behind. At elevated valuations, execution risk becomes more closely watched. Any slip in asset quality, slower branch productivity ramp-up, or macro disruptions could affect market confidence and lead to corrections.
On the other hand, if SBFC can maintain 25-30% annual AUM growth and continue to improve profitability metrics, current valuations can look reasonable in hindsight. Many niche lenders in India have historically commanded premium multiples for long periods, provided they showed consistent execution and conservative risk management.
For retail investors, SBFC represents a story of disciplined growth in a large, underserved market. However, it is important to remember that lending is a cyclical business and is always vulnerable to local economic or policy changes. Investors should continue to watch asset quality metrics, branch-level profitability, and how effectively SBFC manages credit costs as it scales.
In summary, while the stock may no longer be the hidden gem it once was, SBFC's approach suggests it can still deliver steady value over the long term if it stays true to its disciplined strategy.
Note: This article relies on data from annual and industry reports. We have used our assumptions for forecasting.
Parth Parikh has over a decade of experience in finance and research and currently heads the growth and content vertical at Finsire. He holds an FRM Charter and an MBA in Finance from Narsee Monjee Institute of Management Studies.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
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