Synopsis: Small finance banks (SFBs) in India are expected to experience a slowdown in credit growth to 26% this fiscal year, down from 28% in the previous fiscal year, as they explore alternative non-deposit funding sources, according to a Crisil report.
A recent report by Crisil projects that the credit growth of small finance banks (SFBs) in India will decelerate to 26% in the current fiscal year, compared to 28% in the previous fiscal year.
This slowdown is primarily attributed to these banks exploring alternative non-deposit funding avenues to sustain their operations and growth.
The Crisil report highlights that SFBs are increasingly diversifying their loan portfolios, focusing on new asset classes such as mortgages and vehicle loans.
This shift is expected to result in a robust 40% growth in these new segments, significantly outpacing the traditional segments, where growth is anticipated to be around 20%.
The evolving portfolio mix suggests that the share of new segments will likely exceed 40% by March 2025, a remarkable increase from the levels seen in March 2020.
Ajit Velonie, Senior Director at Crisil Ratings, emphasized that this shift in portfolio dynamics reflects the strategic approach of SFBs to capitalize on emerging opportunities.
As these banks expand into semi-urban and rural markets, they are tapping into areas with substantial unmet demand, further fueling their growth trajectory.
To optimize deposit mobilization, SFBs are expected to maintain a strong reliance on term deposits, especially in the current high-interest-rate environment.
Subha Sri Narayanan, Director at Crisil Ratings, noted that the higher opportunity cost of maintaining current and savings account (CASA) balances makes term deposits a more attractive option for both banks and depositors.
Additionally, SFBs may increasingly seek refinancing lines from Alternative Investment Funds (AIFs), which not only offer diversification benefits but also potential cost savings.
As SFBs continue their geographical and segmental expansion, their strong presence in semi-urban and rural markets will be a key driver of growth.
These regions, characterized by large unmet demand, present significant opportunities for SFBs to expand their footprint and enhance their credit portfolios.
In conclusion, while small finance banks in India are expected to experience a modest slowdown in credit growth this fiscal year, their strategic focus on diversification and expansion into underpenetrated markets is likely to sustain their overall growth momentum.
The shift towards new asset classes and alternative funding sources reflects the sector's adaptability and resilience in a dynamic financial landscape.
Disclaimer: The information provided in this article is based on data from Crisil and other sources believed to be reliable. However, it should not be construed as financial advice. Readers are encouraged to conduct their own research and consult with financial experts before making any investment decisions.
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