Profitability of small finance banks likely to decline in FY25, says CRISIL

The profitability of small finance banks, measured in terms of return of assets (RoA), will moderate around 40 basis points to about 1.7 per cent this fiscal from 2.1 per cent in last financial year due to lower net interest margins (NIM) and higher credit costs, said a report.

That said, RoA for small finance banks (SFBs) will still be higher than that for the overall banking system by 50-60 bps on account of the relatively higher yielding nature of their loan book, Crisil said in the report.

Last month, Reserve Bank Deputy Governor Swaminathan J had asked SFBs to be vigilant and ensure that risks are mitigated in time.

He also highlighted the importance of sustainable business models. He underscored the need to strengthen cybersecurity to safeguard against digital threats.

The report said NIM for SFBs is expected to contract 15 bps as they continue diversifying to secured asset classes, which have relatively lower yields.

Credit cost, meanwhile, may rise to about 40 bps because of rising delinquencies, primarily in the microfinance and other unsecured segments, it said.

An uptick in delinquencies, albeit more controlled, is also likely in sub-segments of secured assets classes catering to a similar customer segment.

"SFBs have been focusing on segmental diversification as a core growth strategy. With many having started out as microfinance lenders, the diversification has largely been towards secured asset classes (primarily loans against property, housing loans and vehicle loans), to curtail potential volatility in asset quality and earnings," it said.