Small finance banks expansion forecast: Non-microfinance segments fueling significant fiscal year growth

Mumbai: Advances by small finance banks (SFBs) are expected to surpass ₹2 lakh crore this fiscal year, marking a 16–17 per cent year-on-year (YoY) growth and outpacing last year’s 13 per cent expansion, according to a report released on Tuesday.

The growth will be driven by sustained momentum in non-microfinance segments and a gradual recovery in the microfinance loan book, which had experienced a decline in the previous fiscal, Crisil Ratings said in its analysis.

The report highlighted that building a stable and granular liability franchise remains critical for SFBs amid the ongoing credit growth.

As of March 2025, non-microfinance advances accounted for 67 per cent of total SFB loans, up from 50 per cent in March 2022. Within this segment, mortgage loans, including housing loans and loans against property, had the largest share, growing at an estimated three-year compound annual growth rate (CAGR) of 38 per cent.

This was followed by vehicle loans and MSME loans, which grew at three-year CAGRs of 32 per cent and 31 per cent, respectively. SFBs have also increased their exposure to gold loans, agricultural credit, loans against fixed deposits, and wholesale funding over the past three years.

“This fiscal, credit growth in the non-microfinance segments is expected to be 23-25 per cent. While lower interest rates will support demand for affordable housing, policy spurs for MSMEs and tailwinds from the recent reduction in the goods and services tax on vehicle loans will be helpful, too,” said Aparna Kirubakaran, Director, Crisil Ratings.

She added that microfinance is projected to grow by 4–5 per cent, a recovery from the 14 per cent decline recorded last fiscal.

The report noted that segmental diversification has long been a key growth strategy for SFBs, many of which originated as microfinance institutions (MFIs). This trend will continue through the current fiscal, as recent headwinds in the microfinance sector have reinforced the need to expand into other segments to mitigate asset-quality risks.

Diversification is also essential for SFBs aspiring to obtain a universal banking licence, with Reserve Bank of India (RBI) guidelines requiring gross and net non-performing asset (NPA) ratios to remain below 3 per cent and 1 per cent, respectively.

Given the susceptibility of microfinance loans to sociopolitical pressures, Crisil said diversification, particularly into secured asset classes, will help safeguard asset quality. The RBI’s framework, it added, also gives preference to SFBs with well-diversified loan portfolios.

IANS