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Small finance banks’ growth likely to moderate to 18-20% in FY25: ICRA
Jan-15-2025

Credit rating agency ICRA in its latest report has said that the small finance banks (SFBs) had witnessed a strong growth momentum in FY2023 and FY2024, with expansion being driven by buoyant credit demand and improved product offerings by them. However, given the industrywide headwinds, specifically in the microfinance segment, ICRA expects the SFB growth to moderate in FY2025 to 18-20% from 24% in FY2024 and subsequently pick up in FY2026 to 20-23%.  

The report said after registering an improvement in the asset quality indicators in FY2024, the trend reversed in H1 FY2025, with the SFBs reporting a 50-bps increase in Gross Non-Performing Asset (GNPA) to 2.8% as of September 2024, driven by slippages, primarily in the microfinance loans. ICRA believes that the stress in the microfinance loans and seasoning will weigh upon asset quality indicators of the SFBs in FY2025. Elevated risk of the stress spillover to other asset classes would keep asset quality volatile. 

From a funding perspective, it said the SFBs have been gradually increasing the share of current account and savings accounts (CASA) deposits over the years and the same stood at around 28% as of the end of September 2024, albeit significantly lower than universal banks. The CD ratio stood at around 89% as of September 2024 (reduced from 97% in March 2023), which at present is comparable to the private sector bank average. However, it is expected to reduce further. In line with the trend seen in universal banks, there has been a move towards term deposits offering higher interests, thus leading to a drop in the share of CASA deposits across most SFBs in H1 FY2025. Increasing the share of these deposits will be a challenge for the SFBs. The trend is likely to continue over the near term.

ICRA projects the SFBs’ margins to witness compression as the cost of funds remains elevated and the share of secured loans goes up. Operating expenses, in relation to average assets, rose in FY2024 because of the branch expansion, higher employee expenses and increasing efforts towards recoveries from delinquent customers. With a more calibrated expansion in the current fiscal, the operating ratios shall benefit from higher efficiency. Higher credit costs, however, shall lead to a moderation in the overall profitability in FY2025. 
 

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