Small Finance Banks Brace for Profitability Dip Amid Challenges

The profitability of small finance banks is expected to decrease by 40 basis points this fiscal year, mainly due to lower net interest margins and increased credit costs. Despite this decline, these banks remain more profitable than the overall banking system, thanks in part to their high-yield loan portfolios.

Small finance banks are expected to see a drop in profitability this fiscal year, decreasing by around 40 basis points to an estimated 1.7%. This decline is attributed to lower net interest margins and increased credit costs, according to a recent report.

Despite the downturn, Crisil's report highlights that small finance banks will continue to outperform the broader banking system by about 50-60 basis points, benefiting from their higher-yielding operations.

The Reserve Bank Deputy Governor has urged vigilance among these banks, emphasizing the importance of mitigating risks and maintaining sustainable business models while improving cybersecurity measures.

(With inputs from agencies.)