The growth trajectory of small finance banks (SFBs) in India is projected to reach 20-23% in the fiscal year 2026 (FY26), up from an anticipated 18-20% in FY25, as per a report released on Tuesday by credit rating agency ICRA. This uptick comes as SFBs continue to strengthen their funding base and diversify their offerings.
SFBs have been progressively increasing the share of current account and savings accounts (CASA) deposits, which stood at approximately 28% at the end of September 2024. This increase highlights a strategic shift in their funding approach. The credit-deposit (CD) ratio for SFBs was reported at 89% as of September 2024, aligning closely with the average of private sector banks.
In tandem with trends seen in universal banks, there has been a notable move towards term deposits that offer higher interest rates, a trend expected to persist in the near term, the report noted.
Amid industry-wide challenges, particularly within the microfinance segment, ICRA forecasts a moderation in SFB growth for FY25 to 18-20%, down from 24% in FY24. However, growth is expected to rebound to 20-23% in FY26.
“The SFBs have been diversifying their product offerings over the years to include other retail asset classes such as vehicle loans, business loans, loan against property (LAP), gold loans, and housing finance. This diversification has resulted in a reduction in the share of unsecured loans in their overall portfolio,” stated Manushree Saggar, Senior Vice President and Sector Head-Financial Sector Ratings at ICRA.
Given the challenges in the microfinance sector, a larger share of incremental business for SFBs is expected to come from secured asset classes, which are likely to be the main growth drivers in FY26, Saggar added.
“With a more calibrated expansion in the current fiscal, operating ratios are expected to benefit from higher efficiency. However, higher credit costs are anticipated to moderate overall profitability in FY25,” the report concluded.
These insights underscore the evolving landscape of small finance banks in India, as they navigate funding strategies and product diversification to sustain growth amidst sectoral headwinds.
