Indian Small Finance Banks Set for 25-27 Percent Advance Growth This Fiscal Year
A CRISIL Ratings report indicates that the growth of small finance banks (SFBs) in India will be propelled this fiscal year by their strategic expansion across segments and regions. Their increasing foothold in semi-urban and rural markets, where there is significant unmet demand, is expected to drive a strong 25-27 percent growth in advances.
These banks are approved by the Reserve Bank of India (RBI), with the objective of furthering financial inclusion by primarily extending basic banking services to unserved and underserved sections, which include small and marginal farmers, small business units, micro and small industries and unorganized entities.
Despite facing challenges in raising deposits and dealing with higher costs, small finance banks (SFBs) are likely to seek alternative, non-deposit funding sources to support credit growth. Nonetheless, the report highlights that SFBs continue to maintain healthy capital buffers to sustain their growth.
“Credit growth in new asset classes is seen at 40 percent this fiscal, while that in traditional segments will be 20 percent. With this, the portfolio mix will continue to shift. The share of new segments would cross 40 percent by March 2025, twice the March 2020 level”, said Ajit Velonie, senior director, CRISIL Ratings.
Most of this diversification is towards secured asset classes, resulting in the share of secured lending rising, albeit at a moderate pace, ne informed. The estimated credit growth can be divided into two segments — traditional and new, with the latter driving the momentum.
According to the report, the composition of new asset classes will differ among small finance banks (SFBs) based on their initial segment focus, but will generally include mortgage loans, loans to MSMEs, vehicle loans, and unsecured personal loans. Geographically, SFBs have significantly expanded their branch network, more than doubling to 7,400 branches over the past five years. Notably, deposit growth in fiscal 2024, at 30 percent, outpaced credit growth, a trend contrary to the overall banking sector.
“To optimize deposit mobilization, the reliance on term deposits will continue, given the higher opportunity cost to maintain CASA balances for depositors in the current interest rate scenario”, the report said. Subha Sri Narayanan, Director at CRISIL Ratings, noted that small finance banks (SFBs) will need to consider alternative funding strategies to balance growth with funding costs, particularly as the proportion of lower-yielding secured assets increases.
