Small Finance Banks In Slower Growth Lane In FY2025 Amid Asset Quality Challenges
Updated: Jan 15, 2025 04:08:50pm

Small Finance Banks In Slower Growth Lane In FY2025 Amid Asset Quality Challenges
New Delhi, Jan 15 (KNN) Small finance banks (SFBs) in India are bracing for a slowdown, with growth rates expected to moderate to 18-20 percent in FY2025, according to a recent analysis by credit rating agency ICRA.
This marks a notable deceleration from the sector's robust 24 percent expansion in FY2024, reflecting mounting challenges in both growth and profitability metrics.
The microfinance segment appears particularly vulnerable, with ICRA projecting the gross non-performing asset (GNPA) ratio to reach 2.6-2.8 percent by March 2025, an increase from 2.1 percent in FY2024.
This deterioration in asset quality is expected to impact profitability, with return on assets (RoA) forecast to decline to 1.4-1.6 percent in FY2025 from 2.1 percent in the previous fiscal year, though a modest recovery to 1.6-1.8 percent is anticipated in FY2026.
In response to these challenges, SFBs are actively diversifying their portfolios, according to Manushree Saggar, Senior Vice President and Sector Head of Financial Sector Ratings, ICRA.
The banks are increasingly focusing on secured asset classes, including vehicle loans, business loans, LAP, gold loans, and housing finance, reducing their exposure to unsecured lending.
This strategic shift is expected to drive growth in FY2026, particularly as pressures in the microfinance sector persist.
Asset quality trends have already shown signs of stress, with the GNPA ratio increasing by 0.5 percent to 2.8 percent by September 2024, primarily due to defaults in microfinance loans.
ICRA anticipates further deterioration in FY2025, with potential ripple effects impacting secured asset classes as well. The combination of loan seasoning and stressed microfinance operations is expected to maintain volatility in asset quality metrics.
From a funding perspective, while SFBs have made progress in improving their current account and savings account (CASA) deposits to 28 percent by September 2024, this remains substantially below universal bank levels.
The credit-deposit ratio has declined to 89 percent from 97 percent in March 2023, with further reductions expected. Increased competition for deposits is likely to drive SFBs toward higher-cost term deposits, potentially squeezing margins.
Although operating expenses are expected to stabilise following recent branch expansion efforts, elevated credit costs are projected to continue weighing on overall profitability.
(KNN Bureau)