SRG Housing Finance Q1 FY2026: Why Profits Grew But Returns Slipped – Is This Rural Lender Still a Buy?

SRG Housing Finance Limited, a name increasingly synonymous with rural and affordable housing finance, has just unveiled its Q1 FY2026 investor presentation. As a specialist catering to the New-to-Credit and underserved segments, SRG’s performance this quarter offers crucial insights into its growth trajectory and operational efficiency. The market is always forward-looking, and while current numbers tell a story, it’s the signals for the future that truly capture attention. So, what’s brewing beneath the surface of SRG’s latest financial update? Let’s dive in.

The Pipeline: New Approvals – Fueling Future Growth

For a housing finance company, “New Approvals” are akin to the order book for a manufacturing firm – they represent the pipeline for future disbursements and, ultimately, the loan book growth.

In Q1 FY2026, SRG Housing Finance reported New Approvals of ₹81.15 Cr. This marks a notable 74% surge year-on-year (YoY) compared to ₹46.51 Cr in Q1 FY2025. This robust growth on an annual basis clearly indicates expanding market reach and strong demand for their focused product offerings in rural and underserved markets. It speaks volumes about the company’s ability to onboard new customers and expand its footprint.

However, a quarter-on-quarter (QoQ) perspective reveals a slight dip from the previous quarter’s ₹115.15 Cr in Q4 FY2025. While this might initially raise an eyebrow, it could be indicative of typical seasonality in the lending business or a period of consolidation after a particularly strong preceding quarter. Given the significant YoY jump, this QoQ moderation isn’t necessarily a red flag, but rather something to monitor in the coming quarters to ensure the growth momentum is sustained. The long-term trend, as evidenced by approvals almost doubling over the last year, remains highly positive, setting the stage for future revenue generation.

Converting Pipeline to Performance: Disbursements and Loan Book Expansion

Disbursements are where approvals translate into actual business and revenue streams. For SRG, Q1 FY2026 saw disbursements of ₹80.00 Cr, a substantial 79% increase YoY from ₹44.57 Cr in Q1 FY2025. This mirrors the strong approvals growth and demonstrates the company’s efficiency in converting its pipeline into active loans. It’s a clear sign of operational execution and meeting the growing demand.

Similar to approvals, disbursements also saw a QoQ decline from ₹106.48 Cr in Q4 FY2025. Again, this quarterly ebb and flow could be seasonal, but the strong annual performance confirms the underlying business strength.

The most critical metric reflecting the company’s core asset growth is the Outstanding Loan Book (Assets Under Management - AUM). As of June 30, 2025, SRG’s AUM stood at ₹795.39 Cr, marking a healthy 26% growth YoY from ₹629.6 Cr in Q1 FY2025. Even QoQ, AUM grew consistently from ₹759.36 Cr in Q4 FY2025. This consistent expansion of the loan book, despite the quarterly fluctuations in new approvals and disbursements, underscores the robust demand for its products and effective portfolio management.

This growth is being driven primarily by an increase in volumes, as evidenced by the growing AUM. While average ticket size has increased YoY (₹10.87 Lakhs in Q1FY26 vs ₹6.19 Lakhs in Q1FY25), reflecting a slight shift or expansion in the target loan amount, the core growth engine is clearly the increasing number of customers served and loans disbursed.

Operational Efficiency & Asset Quality: A Mixed Picture

Moving beyond top-line growth, it’s crucial to assess how efficiently the company operates and manages risk.

Net Interest Income (NII), the core earning engine, saw a healthy YoY increase to ₹20.38 Cr in Q1 FY2026 from ₹17.02 Cr in Q1 FY2025, reflecting the growing loan book. The company also boasts “Best in class NIMs: 2.62% in Q1FY26” and a “Spread earned in Q1FY26: 9.08%,” which are strong indicators of its ability to maintain healthy interest margins.

However, a key metric for financial institutions, asset quality, shows a nuanced picture. The Gross NPA (GNPA) ratio improved significantly YoY to 1.85% in Q1 FY2026 from 2.19% in Q1 FY2025. Similarly, Net NPA (NNPA) ratio improved YoY to 0.62% from 0.67%. This demonstrates improved collection efficiency and risk management over the past year. Yet, on a QoQ basis, there’s a marginal increase in both GNPA (1.85% from 1.84%) and NNPA (0.62% from 0.61%). While these are small movements and still represent low NPA levels, they warrant close monitoring. The fact that GNPA in Maharashtra, Karnataka, and Andhra Pradesh is Nil as of Q1FY26 indicates strong performance in newer geographies, which is a positive sign.

Cost to Income (C/I) Ratio is also an important efficiency indicator. It saw a slight YoY increase to 67.48% from 64.98% in Q1 FY2025, but remained stable QoQ. This indicates that while expenses have grown, they are largely in line with the increased operational scale. The company’s continued investment in digital initiatives like “SRG SRAJAN” and expansion into new branches (90 to 93 branches) would naturally lead to higher operational costs, which should ideally be offset by future revenue growth.

The Bottom Line: Profitability and Shareholder Returns

Ultimately, growth must translate into profits. SRG Housing Finance reported a Profit After Tax (PAT) of ₹6.78 Cr in Q1 FY2026, marking a solid 15.7% increase YoY from ₹5.86 Cr in Q1 FY2025. This reflects the impact of increased loan book size and stable margins.

However, the Return on Average Equity (RoAE) declined YoY to 2.54% from 3.57%, and Return on Average Assets (RoAA) also declined to 0.77% from 0.85%. This apparent contradiction – growing PAT but declining return ratios – is an important nuance. The key lies in the company’s recent strategic fundraises. SRG raised significant capital: ₹10 Cr in Mar-May 2024, ₹25.94 Cr in Jul 2024, and ₹49.93 Cr in Mar 2025. This substantially increased its equity base, which, while strengthening its capital position for future growth, temporarily diluted return ratios as the new capital is yet to be fully deployed to generate proportionate profits. This is a typical phenomenon for companies in a strong growth phase making strategic investments in their balance sheet.

Strengthening the Foundation: Capital and Liquidity

A strong capital base and robust liquidity are non-negotiable for a financial institution, especially one targeting the growth SRG is aiming for.

SRG’s Tier I Capital Adequacy Ratio significantly strengthened to 46.92% in Q1 FY2026 from 34.99% in Q1 FY2025. This remarkable improvement is a direct result of the aforementioned fundraises. This elevated capital adequacy provides a substantial buffer for future loan book expansion and absorbs potential risks, positioning SRG for aggressive yet sustainable growth.

The company also maintains a healthy liquidity position, with ₹47.23 Cr in total liquidity as of June 30, 2025, including cash, investments, and unutilized credit limits. Its diversified borrowing mix, drawing from 32 lenders including NHB, public sector, private banks, and various NBFCs, further de-risks its funding profile. This diversified access to capital ensures the company can fuel its continued growth without over-reliance on a single source.

The Path Forward: A Fast Grower in a Niche Segment?

SRG Housing Finance Limited’s Q1 FY2026 performance paints the picture of a company in a vigorous growth phase. The strong YoY increases in approvals, disbursements, and AUM indicate robust demand for its specialized offerings in rural and underserved housing finance – a segment well-aligned with India’s domestic growth themes and government thrust on affordable housing.

While the QoQ moderation in approvals and disbursements should be watched, the overall trend supported by strong YoY growth and a consistently expanding AUM is highly encouraging. The improvement in asset quality YoY, coupled with a significantly strengthened capital base from recent fundraises, lays a solid foundation for future expansion. The temporary dip in profitability ratios (RoAE/RoAA) is understandable given the capital infusion and signifies a strategic investment in balance sheet strength rather than operational weakness.

SRG appears to be positioning itself as a “fast grower” within its niche, leveraging its focused business model, deep rural penetration, digital ecosystem (“SRG SRAJAN”), and diversified funding sources. The commitment to small-ticket, low LTV loans to the non-salaried segment, coupled with a robust collection framework, underscores its cautious yet ambitious approach.

For investors, the focus should be on how effectively SRG can deploy its enhanced capital base to sustain the current growth momentum while maintaining asset quality and improving operational efficiency. The macro indicators for the Indian economy – strong GDP growth projections, easing inflation, and supportive government policies – provide a favourable backdrop for companies like SRG focusing on domestic demand. The upcoming quarters will be key to seeing if SRG continues to deliver on its promise of consistent, profitable growth in this promising segment.

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