The relaxation will allow them, especially those with higher share of unsecured loans, to operate with greater flexibility, optimising capital allocation towards secured and high-value loans, which in turn will help them improve asset quality and boost profitability, the heads of these lending institutions said.

They expressed optimism that the regulatory change would enhance the attractiveness of small finance banks (SFBs) for investors and help them raise fresh capital. The share price of Equitas Small Finance Bank, jumped 4.5% to close at ₹67.40 apiece on Monday on the BSE, even as the Sensex fell 0.66% in reaction to the US attack on Iranian nuclear facilities. ESAF Small Finance Bank‘s share price rose 3.2% to ₹32.2, while Jana SFB saw its price go up 3.9% to ₹506.1.

“The new regulation helps improve asset quality, optimise capital allocation, and enhance profitability-while continuing to serve priority sectors meaningfully,” Capital Small Finance Bank managing director Sarvjit Singh Samra told ET.

The banking regulator on Friday lowered SFBs” priority sector lending target to 60% of adjusted net bank credit (ANBC) or credit equivalent of off-balance sheet exposures (CEOBE), whichever is higher, from 75% earlier.

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The SFB shall continue to allocate 40% of ANBC or CEOBE to different sub-sectors under the priority sector, while the balance 20% can be allocated to any one or more sub-sectors where the bank has a competitive advantage. “This shift is expected to strengthen asset quality and enhance the overall stability of SFBs’ loan portfolios,” ESAF Small Finance Bank managing director K Paul Thomas told ET. ESAF, with half of its loan portfolio of ₹19,643 crore being unsecured, had its gross non-performing assets ratio at 6.9% at the end of March. Suryoday SFB’s gross NPA was 7.2% at the end of last fiscal. There are 11 small finance banks with a total loan portfolio of ₹2.79 lakh crore.Paul Thomas said that earlier SFBs had to extend a significant share of unsecured loans and other small-ticket priority loans, which could carry higher credit risk. “With a reduced PSL requirement, SFBs can moderate their exposure to unsecured lending and focus more on secured advances, such as MSME loans, affordable housing, gold loans, and other collateral-backed products, while still fulfilling their core objectives,” he said.The immediate impact would be release of excess priority sector loans that these banks carry in their balance sheet. This will lead to a higher sale of priority sector lending certificates to other banks. “This may help in increased income though marginal through PSLC sale,” Suryoday SFB MD R Baskar Babu said.

The new norm is viewed as a strong enabler for SFBs with universal banking aspirations. “As we work toward achieving 60% priority sector lending compliance, the revised norms open up space for us to build a more balanced and diversified asset mix-a critical enabler for universal banking operations,” Jana managing director Ajay Kanwal said.