Small finance banks to grow their loan book by 25-27% this fiscal: Crisil

Mumbai, Aug 26: Small finance banks (SFBs) are expected to grow their loan book by a robust 25-27 per cent this fiscal year, Crisil Ratings said on Monday.

However, the growth in loan books will be slightly lower than the previous fiscal growth of 28 per cent, as per the report by the agency. Growth will be sustained by segmental and geographic expansion supported by a robust and growing presence in semi-urban and rural markets with significant unmet demand, according to the estimation of the Crisil Ratings. It said, noting the difficulty of mobilizing deposits, SFBs will probably look into non-deposit alternatives in order to finance credit expansion.

The SFBs continue to have healthy capital buffers to sustain growth, as per the report.

"Credit growth in new asset classes is seen at 40 per cent this fiscal, while that in traditional segments will be 20 per cent. With this, the portfolio mix will continue to shift; the share of new segments will cross 40 per cent by March 2025, twice the March 2020 level. Most of this diversification is towards secured asset classes, resulting in the share of secured lending rising, albeit at a moderate pace," said Ajit Velonie, Senior Director, of CRISIL Ratings.

Highlighting the growth, the report said that in the five years ending in March 2024, the geographical penetration of the SFB branch network more than doubled to 7,400. About 15 per cent of branches were located in the east up from 11 per cent in March 2019.

This region had the greatest traction, Crisil Ratings said adding that rural and semi-urban areas present a considerable market potential, where more than half of the current branches are located. Compared to the banking industry as a whole, deposit growth, at almost 30 per cent in fiscal 2024, exceeded credit growth, the report highlighted. Ninety per cent of borrowings currently come from deposits, as per the report.

To optimise deposit mobilisation, the reliance on term deposits will continue, given the higher opportunity cost to maintain CASA balances for depositors in the current interest rate scenario, it added.

Subha Sri Narayanan, Director, CRISIL Ratings said, "SFBs will need to explore alternative funding routes to balance growth and funding cost, especially given the growing share of lower yielding secured assets. Securitisation is gaining currency, with transactions reaching Rs 9,000 crore last fiscal from Rs 6,300 crore in fiscal 2023, with five SFBs tapping the market. We could also see SFBs resorting to obtaining more refinancing lines from AIFIs, which, apart from the diversification benefit, could offer cost savings."

While deposits and other borrowings remain a focus area, as per the report, the SFBs are well-placed on the capital front, having raised over Rs 8,000 crore in the past three years.

This includes almost Rs 2,700 crore through initial public offerings by a few SFBs to meet their licensing requirements. Revived internal accrual has also aided the capital base.

The report further highlighted that most SFBs have a healthy capital buffer, reflected in three-year average Tier I and overall capital adequacy ratio (CAR) of per cent 19.7 per cent and 26.6 per cent, respectively.