Growth Slowdown Expected for Small Finance Banks

According to ICRA, a leading credit rating agency, small finance banks (SFBs) are projected to face a growth slowdown to 18-20% in FY2025. This marks a significant deceleration from the 24% growth observed in FY2024. The anticipated slowdown is attributed to rising delinquencies and asset quality issues, particularly within the microfinance segment.

Asset Quality and Diversification Efforts

Manushree Saggar, a senior vice president at ICRA, highlighted the efforts of SFBs to diversify their portfolios. By increasing their focus on secured asset classes such as vehicle loans, business loans, LAP, gold loans, and housing finance, SFBs aim to reduce the share of unsecured loans. This strategic shift is expected to drive growth in FY2026, despite the current challenges.

Challenges Ahead

The asset quality of SFBs is under strain, with the gross non-performing asset (GNPA) ratio expected to rise to 2.6-2.8% by March 2025. Funding and profitability pressures are also mounting, with the credit-deposit (CD) ratio dropping and margins compressing due to elevated funding costs. Despite these challenges, a modest recovery in return on assets (RoA) is anticipated in FY2026.