SFBs: The canter on a chequered terrain

Segmental and geographical expansion, undergirded by strong and increasing presence in semi-urban and rural markets with large untapped potential, will help small finance banks (SFBs) clock robust 25-27 per cent growth in advances this financial year, just shy of 28 per cent in the previous year.

- Krishnan Sitaraman

Net interest margins (NIMs) could, however, contract 15 basis points (bps) year-on-year as SFBs continue to diversify into secured asset classes that fetch lower yields.

Also, with credit cost expected to increase 40 bps amid rising delinquencies in the unsecured segments (including microfinance), the return on assets is likely to decline nearly 40 bps to 1.7 per cent this financial year.

Growth in credit will be split across traditional and new segments, with the latter set to achieve nearly 40 per cent growth. New asset classes chosen by SFBs may vary in line with their initial segment focus but would typically entail secured segments. With sharper focus, the share of secured lending is slated to rise to 65 per cent by financial year 2025 (FY25) from 62 per cent in FY24. However, NIMs could compress to 7.2 per cent as yields on secured loans are typically 6-7 percentage points lower than on unsecured loans.

To combat this and achieve balanced credit growth, the funding side is crucial.