Small Finance Banks' loan growth to lower to 25-27% in FY25: CRISIL Ratings

Small Finance Banks' (SFBs) loan growth will moderate to 25-27 per cent in FY25 against 28 per cent in FY24, a domestic rating agency said on Monday.

Crisil Ratings said though a tad lower, the advances growth will be robust and driven by factors like segmental and geographical expansion by the entities.

While capital buffers remain healthy, SFBs will face challenges in mobilising deposits and their costs and will explore alternative, non-deposit avenues to fund credit growth, the agency said.

The asset growth will be driven by traditional microlending being the most popular and new ones like mortgages, small businesses or even unsecured loans.

"Credit growth in new asset classes is seen at 40 per cent this fiscal, while that in traditional segments will be 20 per cent," its senior director Ajit Velonie said.

He added that the share of new asset classes will cross 40 per cent by the end of March 2025 on the back of the faster growth and underlined that most of the asset diversification is for secured assets.

From a network perspective, the agency said the branches more than doubled during the five years to March 2024 to 7,400.

The maximum traction was in the eastern region, which now houses 15 per cent of branches against 11 per cent in March 2019, it said, adding that more than half the existing branches are in rural and semi-urban regions, which have sizeable market potential.

In FY24, the deposit growth outpaced that of credit at 30 per cent, which is different from the overall banking sector, it said, adding that 90 per cent of the liabilities come from this avenue.

It, however, added that with the growth drivers in place, both capital and deposits, including other borrowings, need to be focused.

The agency said 30 per cent of the total deposits are the expensive bulk deposits, and added that the reliance on this avenue was just 23 per cent in FY22-end. The share of low-cost current and savings account deposits has slipped to 28 per cent from 35 per cent.

Noting that the SFBs typically give up to 2.50 per cent higher interest offerings than banks, the report said reliance on term deposits will continue given the higher opportunity cost to maintain CASA balances for depositors in the current interest rate scenario.

Among the alternatives, securitisation is gaining currency, the agency said, pointing out that transactions reached Rs 9,000 crore in FY24 from Rs 6,300 crore in FY23, with five SFBs tapping the market. A total of five entities have accessed this route till now, it said.

"We could also see SFBs resorting to obtaining more refinancing lines from all India financial institutions, which, apart from the diversification benefit, could offer cost savings," its director Subha Sri Narayanan said.