In a recent report by CareEdge, it has been projected that small finance banks (SFBs) in India are expected to witness a significant growth in their advances and deposits by 22-25 per cent in the financial year 2024. This growth is also anticipated to be accompanied by stable profitability, with a return on total assets (ROTA) ranging from 2.1 to 2.4 per cent.

Table of Contents

Advances and Deposits Growth

During the nine-month period ending in December 2023, SFBs managed to raise equity capital amounting to ₹1,527 crore. It is further estimated that they will raise an additional sum of around ₹1,725 crore in Q4 FY24. This infusion of capital sets the stage for the projected growth in advances and deposits for the upcoming financial year.

Despite recent merger announcements, CareEdge does not foresee significant consolidation in the small finance banking sector. One such merger is that of Fincare SFB with AU SFB, indicating strategic moves within the industry.

Credit Cost Concerns Alleviated

With credit cost concerns becoming less prominent and enhanced access to capital, SFBs are now positioned for a robust growth phase. The shift towards more secure lending products such as home, vehicle, MSME, and gold loans has resulted in a gradual decline in the share of microfinance in their portfolios, with microfinance exposure decreasing from 40 per cent in March 2020 to 32 per cent in March 2023.

Portfolio Diversification

The growth of SFBs’ advances at a compound annual growth rate (CAGR) of 32 per cent over the period of FY20 to FY23 outpaces the banking sector’s CAGR of 11 per cent. The evolving mix of loan products offered by SFBs showcases a strategic diversification strategy aimed at reducing reliance on microfinance.

Stable CASA Base

The consistent growth in deposits, with a CAGR of 32 per cent between FY20 and FY23, indicates SFBs’ focus on establishing a robust liability framework. Despite this positive trend, building a stable current account and savings account (CASA) base remains a challenge for SFBs, given the competitive landscape dominated by traditional commercial banks.

Expansion of Branch Network

The expansion of the branch network has been a key strategy for SFBs, with the number of branches growing at a CAGR of 29 per cent since March 2018. Geographically, the branches are well-distributed across India, with a notable concentration in South India (28 per cent) and the western region (20 per cent).

As SFBs gear up for a period of growth and expansion, their operational focus and strategic positioning will be critical in navigating the evolving financial landscape in India.

This article was published on January 26, 2024, by msmestory.

SEO Focus Keyword: Small Finance Banks Growth Outlook