Mumbai (Maharashtra) [India], January 14 : After experiencing robust growth in FY2023 and FY2024, small finance banks (SFBs) are likely to see a moderation in growth to 18-20 per cent in FY2025, down from 24 per cent in FY2024, according to ICRA.
The growth and profitability of small finance banks (SFBs) are expected to face significant challenges in the near term, primarily due to an uptick in delinquencies and asset quality concerns.
ICRA forecasts that the Gross Non-Performing Asset (GNPA) ratio will increase to 2.6-2.8 per cent by the end of March 2025, reflecting heightened stress, particularly in the microfinance segment.
The Return on Assets (RoA) for SFBs will decline to 1.4-1.6 per cent in FY2025, with a marginal recovery expected in FY2026, when the RoA is estimated to rise to 1.6-1.8 per cent, compared to 2.1 per cent in FY2024.
Manushree Saggar, Senior Vice President & Sector Head - Financial Sector Ratings at ICRA, commented, "The SFBs have been diversifying their product offerings over the years to include other retail asset classes such as vehicle loans, business loans, LAP, gold loans and housing finance, which has led to reduction in the share of unsecured loans in their overall pie."
Saggar added, "Considering the stress seen in the microfinance sector, a larger share of incremental business shall come from secured asset classes, which would be the likely growth drivers in FY2026".
The SFBs' asset quality showed signs of improvement in FY2024, but the trend reversed in the first half of FY2025. As of September 2024, the GNPA ratio increased by 50 basis points to 2.8 per cent, largely due to slippages in microfinance loans.
ICRA expects further deterioration in asset quality in FY2025, with potential spillover risks affecting other asset classes. The challenges posed by seasoning in loans, coupled with stress in microfinance, are expected to keep asset quality volatile.
From a funding perspective, SFBs have seen gradual improvements in their share of current account and savings account (CASA) deposits, which stood at around 28 per cent by September 2024.
However, this remains significantly lower than that of universal banks. As of September 2024, the credit-deposit (CD) ratio stood at approximately 89 per cent, down from 97 per cent in March 2023.
ICRA anticipates further reductions in this ratio and highlights the difficulty SFBs will face in increasing their CASA deposits, given the growing trend towards term deposits with higher interest rates.
In terms of profitability, ICRA projects margin compression for SFBs due to elevated costs of funds and an increasing share of secured loans.
Operating expenses, which rose in FY2024 due to branch expansions and higher employee costs, are expected to stabilize with a more calibrated expansion strategy in FY2025. However, higher credit costs are likely to constrain overall profitability.
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