Small Finance Banks in India to Grow Loans by 25-27% This Year, Says Crisil Ratings
Small finance banks (SFBs) in India are expected to grow their loan books by a robust 25-27% this fiscal year, according to Crisil Ratings. This growth is slightly lower than the previous fiscal year’s 28% growth.
Geographic and Segmental Expansion
The growth will be sustained by expanding into semi-urban and rural markets, which have significant unmet demand. The SFBs are also looking into non-deposit alternatives to finance credit expansion due to the difficulty of mobilizing deposits.
Capital Buffers and Asset Classes
SFBs have healthy capital buffers to sustain growth. Credit growth in new asset classes is expected to be 40% this fiscal year, while traditional segments will see 20% growth. The portfolio mix will shift, with the share of new segments crossing 40% by March 2025.
Branch Network and Deposit Growth
The geographical penetration of the SFB branch network has more than doubled to 7,400 branches in the five years ending in March 2024. About 15% of branches are located in the east, up from 11% in March 2019. Rural and semi-urban areas present considerable market potential, with more than half of the current branches located there.
Deposit growth, at almost 30% in fiscal 2024, exceeded credit growth. Ninety percent of borrowings currently come from deposits. To optimize deposit mobilization, reliance on term deposits will continue.
Alternative Funding Routes
SFBs will need to explore alternative funding routes to balance growth and funding costs. Securitization is gaining popularity, with transactions reaching Rs 9,000 crore last fiscal year. SFBs may also obtain more refinancing lines from AIFIs for cost savings and diversification benefits.
Capital Adequacy
SFBs are well-placed on the capital front, having raised over Rs 8,000 crore in the past three years. This includes almost Rs 2,700 crore through initial public offerings. Most SFBs have a healthy capital buffer, with a three-year average Tier I and overall capital adequacy ratio (CAR) of 19.7% and 26.6%, respectively.
Doubts Revealed
Small Finance Banks (SFBs) -: Small Finance Banks are banks that provide financial services to small businesses, farmers, and people in rural areas. They help people who might not get loans from big banks.
Loan books -: Loan books refer to the total amount of money that a bank has lent out to people and businesses. It’s like a record of all the loans given by the bank.
Fiscal year -: A fiscal year is a 12-month period that companies and governments use for financial planning and reporting. In India, it usually starts on April 1st and ends on March 31st of the next year.
Crisil Ratings -: Crisil Ratings is a company that evaluates the financial health of other companies and banks. They give ratings that help people understand how safe or risky it is to invest in or lend to these companies.
Semi-urban and rural markets -: Semi-urban areas are places that are not as developed as big cities but more developed than villages. Rural markets refer to villages and countryside areas where people mostly do farming and small businesses.
Non-deposit alternatives -: Non-deposit alternatives are ways for banks to get money without taking deposits from people. This can include borrowing money from other banks or selling loans to investors.
Capital buffers -: Capital buffers are extra money that banks keep aside to protect themselves in case they face financial problems. It’s like having a savings account for emergencies.
Asset classes -: Asset classes are different types of investments or loans. For example, loans for buying houses, cars, or starting businesses are different asset classes.
Securitisation -: Securitisation is when a bank bundles a group of loans together and sells them to investors. This helps the bank get money quickly and reduces the risk of holding too many loans.
Refinancing -: Refinancing is when a bank takes a new loan to pay off an old loan. This can help the bank get better interest rates or more favorable terms.
