The Business Bytes
New Delhi, August 26, 2024 (TBB Bureau): Small finance banks (SFBs) are projected to witness a robust growth in advances, estimated at 25-27% this fiscal, slightly lower than the previous fiscal’s 28% growth. The expansion is expected to be fueled by both segmental and geographical diversification, with a strong and increasing presence in semi-urban and rural markets, which continue to exhibit substantial unmet demand.
Despite challenges in deposit mobilization and associated higher costs, SFBs are likely to explore alternative, non-deposit avenues to fund credit growth. The capital buffers to support this expansion remain healthy for these banks, ensuring that they can continue their growth trajectory.
Ajit Velonie, Senior Director at CRISIL Ratings, highlighted that credit growth in new asset classes is anticipated to reach 40% this fiscal, compared to 20% in traditional segments. “This shift will see the share of new segments in the portfolio mix surpass 40% by March 2025, doubling the March 2020 level,” he noted. The diversification is largely towards secured asset classes, leading to a moderate increase in secured lending.
The geographical footprint of SFBs has also expanded significantly, with the branch network more than doubling over the past five years, reaching approximately 7,400 branches by March 2024. The eastern region saw the most significant growth, now accounting for 15% of branches, up from 11% in March 2019. Over half of these branches are located in rural and semi-urban areas, which offer considerable market potential.
While these growth drivers are in place, there is a need to focus on liabilities, particularly deposits and capital. In fiscal 2024, deposit growth outpaced credit growth at 30%, a contrast to the broader banking sector. However, this growth has come at a higher cost due to the rising share of bulk term deposits, which now account for nearly 30% of total deposits, up from 23% in fiscal 2022. Concurrently, the share of CASA deposits has decreased to 28%, and that of retail term deposits has also declined.
SFBs are offering a premium of 50-250 basis points on interest rates over universal banks for the same category of deposits, which is contributing to the higher cost of funds. To optimize deposit mobilization, SFBs are expected to continue relying on term deposits, given the current interest rate scenario, which presents a higher opportunity cost for maintaining CASA balances.
Subha Sri Narayanan, Director at CRISIL Ratings, emphasized the need for SFBs to explore alternative funding routes to balance growth and funding costs, especially with the increasing share of lower-yielding secured assets. “Securitization is gaining momentum, with transactions reaching Rs 9,000 crore last fiscal, up from Rs 6,300 crore in fiscal 2023. Additionally, SFBs may seek more refinancing lines from AIFIs, offering both diversification benefits and potential cost savings,” she added.
The outlook for SFBs remains positive, with strong growth prospects driven by strategic diversification and geographical expansion, though careful management of liabilities will be crucial in sustaining this growth.
