Small Finance Banks To Grow Advances 25-27% This Fiscal
The diversification, penetration supportive; alternate liabilities strategies to gain momentum, says Crisil
India's small finance banks (SFBs) are expected to grow their advances by a robust 25 to 27 per cent this fiscal, though a tad lower than the previous fiscal’s 28 per cent growth, Crisil ratings has said. Segmental and geographical expansion, underpinned by a strong and increasing presence in semi-urban and rural markets with large unmet demand, will continue to drive growth.
Amid challenges in mobilizing deposits and their higher cost, SFBs are likely to explore alternative, non-deposit avenues to fund credit growth. That said, capital buffers to support growth remain healthy for SFBs.
The estimated credit growth can be divided into two segments— traditional and new, with the latter driving the momentum. The constituents of new asset classes may vary across SFBs depending on their original segment focus, but would typically include mortgage loans, loans to MSMEs, vehicle loans and unsecured personal loans.
Ajit Velonie, Senior Director, Crisil Ratings said, “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.”
In terms of geographical penetration, the SFB branch network more than doubled over the five years through March 2024, to 7,400. The maximum traction was in the east3, which housed 15 per cent of branches up from 11 per cent as of March 2019. More than half the existing branches are in rural and semi-urban regions, which have sizeable market potential.
With the growth drivers in place, liabilities — both deposits (including other borrowings) and capital — need focus, too. Deposit growth, at 30 per cent in fiscal 2024, outpaced credit growth, in contrast to the overall banking sector. Deposits now constitute 90 per cent of borrowings, but their growth comes at a higher cost for two reasons.
One is an increase in the share of relatively more expensive bulk term deposits to almost 30 per cent of total deposits as of March 2024 from 23 per cent in fiscal 2022. The share of CASA deposits dropped to 28 per cent from 35 per cent, and that of retail term deposits also fell. Two, SFBs offer a premium of 50-250 basis points in interest rates over universal banks, even in the same category of deposits.
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.
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.”
These measures to diversify the resource mix are key, given the elevated credit-deposit ratio of over 90 per cent and a more stringent liquidity coverage ratio framework on the cards. While deposits and other borrowings remain a focus area, 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.
Consequently, the rating agency added that most SFBs have a healthy capital buffer, reflected in three-year average Tier I and overall capital adequacy ratio (CAR) of 19.7 per cent and 26.6 per cent, respectively. Hence, their average buffer over the stipulated regulatory thresholds, is healthy at 12.2 and 11.6 percentage points, respectively.
Given the sizeable untapped market potential and systemic emphasis on financial inclusion, the growth prospects for SFBs remain buoyant, bolstered by universal banking aspirations. The ability of SFBs to ramp up their low-cost, retail deposit franchise to aid their earnings profile while sustaining sound asset quality remains monitorable if they are to successfully leverage this market opportunity.
