Crisil Ratings said on Monday that loan growth for small finance banks is likely to moderate to 25-27 per cent this fiscal compared with 28 per cent last fiscal.
Though slightly slower, loan growth will be strong and driven by factors such as segment and geographic expansion by companies, according to the report.
The agency said that despite maintaining healthy capital buffers, SFBs may face challenges in attracting and managing deposits and may seek alternative non-deposit sources of funding to support credit growth.
Asset growth is expected to be driven by emerging areas such as mortgages, small business loans and unsecured loans, in addition to traditional microlending, which remains highly popular.
“Credit growth in new asset classes is expected to be 40 per cent this year compared to 20 per cent in traditional segments,” said Ajit Belony, senior director at the firm.
Accelerating growth will see the share of new asset classes exceed 40% by the end of March next year, he added, highlighting that most of the asset diversification is towards secured assets.
According to the agency, the number of branches has more than doubled over the past five years, reaching 7,400 by March 2024.
The Eastern region has seen the most notable increase, with branch numbers now standing at 15% from 11% in March 2019. More than half of the branches are in rural and semi-urban areas, which have large market potential.
Deposit growth is expected to outpace credit growth by 30% in FY24, a departure from the broader banking industry. Notably, 90% of liabilities come from deposits.
The agency stressed that while growth drivers such as capital and deposits are important, there also needs to be focus on managing other sources of funding.
The agency said 30% of all deposits were high-value bulk deposits, with reliance on this vehicle at just 23% at the end of fiscal 2022. The share of low-cost current and ordinary deposits fell to 28% from 35%.
The report noted that SFBs typically offer interest rates up to 2.5 percentage points higher than banks, and said reliance on fixed term deposits would continue as depositors have a high opportunity cost of holding CASA balances in the current interest rate environment.
Among alternatives, securitisation is becoming popular, reaching Rs 9,000 crore in FY2024 from Rs 6,300 crore in FY2023, with five SFBs entering this market, the agency noted. A total of five firms have accessed this route so far, the agency said.
“SFB may also look to obtain larger refinancing facilities from financial institutions across India, which apart from the diversification benefits could also help cut costs,” said Subha Sri Narayanan, a director at the bank.
(With inputs from PTI)
