MUMBAI: Advances of small finance banks (SFBs) are poised to cross the Rs 2 trillion mark this fiscal, marking a growth of 16-17 percent on-year, surpassing the 13 percent clip in the last fiscal on the back of continued expansion in the non-microfinance segments coupled with calibrated recovery of the microfinance loan book from the degrowth seen last fiscal.
Amid the healthy credit growth, building a granular and sustainable liability franchise remains crucial for these lenders, Crisil Ratings said in a report Tuesday. Segmental diversification has been a long-running growth theme for SFBs, most of which were microfinance institutions (MFIs) at the time of conversion. The approach will continue this fiscal as well with recent headwinds in MFIs persuading sharper focus on diversification to other segments to minimise asset-quality concerns, the report added.
Diversification is also crucial because the Reserve Bank guidelines mandate thresholds of 3 percent and 1 percent for gross and net non-performing assets, respectively, for SFBs to acquire a universal banking licence. Given the susceptibility of MFI loans to sociopolitical pressures, diversification, particularly into secured asset classes, would support asset quality. In addition, these guidelines qualitatively accord preference to SFBs with a diversified loan portfolio.
The share of non-MFI advances in SFB loans had already risen to 67 percent as of March 2025 from 50 percent as of March 2022. Within this, mortgage loans (housing loans and loans against property) had the largest share, having grown at an estimated three-year compound annual growth of 38%. This was followed by vehicle loans and MSME loans, which grew at 32 percent and 31 percent, respectively each year during this period.
SFBs have also increased the share of gold loans, farm credit, loan against fixed deposits and wholesale funding in their loan portfolios over the past three fiscals. According to Aparna Kirubakaran, a director with the agency, this fiscal, credit growth in the non-MFI segments is expected to be 23-25 percent. While lower interest rates will support demand for affordable housing, policy spurs for MSMEs and tailwinds from the recent reduction in GST rates on vehicle loans will be helpful, too.
MFI books on the other hand, will grow a relatively slower 4-5 percent, but that will still be a rebound from the 14 percent decline last fiscal. The sharper focus on non-MFI segments will increase their share to an estimated 70 percent of all advances by the close of this fiscal, she said. While SFBs are poised for a steady loan book expansion, their ability to mobilise deposits at competitive costs and build a granular liability franchise will continue to be a key cog of their growth strategy.
Their deposits had grown 25 percent last fiscal and 34 percent in fiscal 2024, strongly outpacing growth in advances. Over the years, the share of deposits in overall external liabilities of SFBs has risen sequentially (91% as of March 2025, from 70 percent as of March 2020). This was driven by retail deposits (including the low cost Casa), which clocked 34 percent annually during fiscals 2021-25.
The share of retail deposits in the overall SFB deposits has remained above 70 percent since interest rates started trending up in February 2022. However, its composition has moderately shifted towards retail term deposits because of the higher opportunity cost that deposit-holders incur for keeping Casa deposits when interest rates are rising.
According to Vani Ojasvi, an associate director with the agency, historically, what has aided deposit accretion for SFBs is the premium in interest rates offered over universal banks. Even today, that differential is 75-80 bps. Their ability to offer higher deposit rates has been supported by relatively higher asset yields, giving them a cushion to manage net interest margins.
