Small finance banks’ growth to slow down to 18-20 % in FY2025: ICRA

Small finance banks (SFBs) are expected to face a slowdown in FY2025, with growth projected to moderate to 18-20 per cent, as per credit rating agency ICRA. The sector has experienced a significant boom over the past two fiscal years, registering 24 per cent growth in FY2024.
The growth and profitability of SFBs are expected to undergo substantial challenges amid rising delinquencies and asset quality issues.
The agency highlighted that particularly in the microfinance segment, the gross non-performing asset (GNPA) ratio is expected to climb to 2.6-2.8 per cent by March 2025, up from 2.1 per cent in FY2024.
It expected the return on assets (RoA) to dip to 1.4-1.6 per cent in FY2025, compared to 2.1 per cent in the previous fiscal year. However, a modest recovery to 1.6-1.8 per cent is anticipated in FY2026.
Asset diversification
Manushree Saggar, senior vice president and sector head at the financial sector ratings at ICRA, noted that SFBs have been diversifying their portfolios by increasing focus on secured asset classes.
“The SFBs have been diversifying their product offerings over the years to include other retail asset classes such as vehicle loans, business loans, LAP, gold loans and housing finance, which has led to reduction in the share of unsecured loans in their overall pie,” Saggar told news agency ANI.
He also mentioned that, due to the pressures in the microfinance sector, a greater portion of incremental growth is anticipated to stem from secured asset classes, which are expected to be the key drivers of growth in FY2026.
Reversals in asset quality
While SFBs witnessed improvement in asset quality in FY2024, the trend reversed in FY2025. By September 2024, the GNPA ratio had risen by 0.5 per cent to 2.8 per cent, driven by slippages in microfinance loans.
ICRA expected further asset quality deterioration in FY2025, with potential spillover risks affecting other secured asset classes.
The asset quality is expected to remain quite volatile led under the stress posed by seasoning in loans along with a strained microfinance sector.
Funding and profitability pressures
The share of current account and savings account (CASA) deposits for SFBs improved gradually, reaching 28 per cent by September 2024, reflecting a gradual rise from the funding perspective. However, this remains significantly lower than universal banks.
The credit-deposit (CD) ratio dropped to 89 per cent in September 2024, compared to 97 per cent in March 2023, and is expected to decline further.
The ICRA further expected higher competition for deposits to likely push SFBs towards term deposits offering higher interest rates, thereby increasing funding costs.
Margins are expected to compress further due to elevated funding costs and a rising share of secured loans. Meanwhile, operating expenses, which spiked in FY2024 due to branch expansions and increased employee costs, are set to stabilise with a more cautious growth strategy, though higher credit costs will weigh on overall profitability.