SFB NPAs to go up, loan growth to slow to 18-20 pc in FY25: Icra

Mumbai: Domestic rating agency Icra on Wednesday said small finance banks (SFBs) will see an uptick in delinquencies in FY25, and the asset growth will slow down to 18-20 per cent. The slowdown in growth from the 24 per cent in FY24 was attributed to the industry-wide concerns in the microfinance segment, where almost all SFBs are active.

“Considering the stress seen in the microfinance sector, a larger share of incremental business shall come from secured asset classes, which would be the likely growth drivers in FY26,” the agency’s head for financial sector ratings Manushree Saggar said.

Saggar said 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, and the share of unsecured loans has reduced in the overall pie because of such measures.

The gross non-performing assets ratio for SFBs increased 0.5 per cent to 2.8 per cent as of September, driven by the MFI slippages, the agency said, adding that the asset quality will be volatile.

Increasing the share of the low-cost current and saving account deposits will be a challenge for SFBs, and the trend is likely to continue over the near-term, it said.

SFBs’ margins will witness a compression as the cost of funds remains elevated and the share of secured loans goes up, it said, adding that operating expenses have, however, gone up branch expansion, higher employee expenses and increasing efforts towards recoveries from delinquent customers. Higher credit costs shall lead to a moderation in the overall profitability in FY25, it said, pegging the return on assets at the industry level to decline to 1.4-1.6 per cent in FY25, from the 2.1 per cent in FY24.