Small Finance Banks' Loan Growth to Moderate in FY25, Crisil Predicts

Small Finance Banks (SFBs) are expected to see a slight moderation in loan growth to 25-27 per cent in FY25, compared to 28 per cent in FY24, according to Crisil Ratings. Despite this dip, the growth remains strong, driven by segmental and geographical expansion.

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In FY24, deposit growth outpaced credit growth at 30 per cent, differing from the overall banking sector. Ninety per cent of liabilities come from deposits. However, with growth drivers in place, both capital and deposits need attention.

Asset Growth and Diversification

The asset growth for SFBs will be propelled by traditional microlending and new areas like mortgages and small business loans. Credit growth in new asset classes is projected at 40 per cent this fiscal, while traditional segments will see a 20 per cent increase. Ajit Velonie, Crisil's senior director, noted that new asset classes' share will exceed 40 per cent by March 2025.

From a network perspective, SFB branches more than doubled over five years to March 2024, reaching 7,400. The eastern region saw significant traction, housing 15 per cent of branches compared to 11 per cent in March 2019. Over half of these branches are in rural and semi-urban areas with substantial market potential.

Challenges and Alternatives

SFBs face challenges in mobilising deposits and managing costs. They are exploring non-deposit avenues to fund credit growth. Thirty per cent of total deposits are expensive bulk deposits, up from 23 per cent at FY22-end. The share of low-cost current and savings account (CASA) deposits has dropped to 28 per cent from 35 per cent.

Securitisation is becoming popular among SFBs as an alternative funding source. Transactions reached Rs 9,000 crore in FY24 from Rs 6,300 crore in FY23, with five SFBs tapping this market. Additionally, SFBs may seek more refinancing lines from all India financial institutions for cost savings and diversification benefits.

Interest Rates and Deposit Strategies

SFBs typically offer up to 2.50 per cent higher interest rates than banks. This makes term deposits more attractive due to the higher opportunity cost of maintaining CASA balances in the current interest rate scenario.

Despite robust capital buffers, SFBs must focus on both capital and deposit growth to sustain their expansion. The agency highlighted that most asset diversification efforts are geared towards secured assets.

The report underscores the importance of maintaining a balance between credit growth and deposit mobilisation for SFBs. As they continue to expand geographically and segmentally, addressing these challenges will be crucial for sustained growth.