Challenges Loom for Small Finance Banks: Asset Growth Slows Amid MFI Stress

Domestic rating agency Icra predicts an increase in delinquencies for SFBs by FY25, slowing asset growth to 18-20%. The shift is due to concerns in microfinance, with increased focus on secured assets anticipated. Diversification and growing costs impact profitability and asset quality remains volatile.

Domestic rating agency Icra has issued a warning for small finance banks (SFBs), predicting an increase in delinquencies during FY25 alongside a slowdown in asset growth to between 18% and 20%.

This deceleration from a 24% growth rate in FY24 reflects wider concerns in the microfinance segment, where SFBs are heavily involved, according to Icra's head of financial sector ratings, Manushree Saggar.

With pressure in the microfinance sector, emphasis will shift towards secured asset classes in FY26, which are eyed as growth drivers. Other factors impacting SFBs include diversified product offerings, rising operational expenses, and fluctuating asset quality—all contributing to compressed margins and declining profitability.

(With inputs from agencies.)