Bad Loans to Impact Growth & Profitability of Small Finance Banks

Mumbai: With more and more microfinance loans turning bad, small finance banks that had been witnessing strong growth momentum and profitability over the last two years would see them moderating. According to rating agency ICRA, SFB growth would moderate in FY2025 to 18-20 per cent from 24 per cent in FY2024 and subsequently pick up in FY2026 to 20-23 per cent.

After registering an improvement in the asset quality indicators in FY2024, the trend reversed in H1 FY2025, with the SFBs reporting a 50-bps increase in gross non-performing asset (GNPA) to 2.8 per cent as of September 2024, driven by slippages, primarily in the microfinance loans. ICRA believes that the stress in the microfinance loans and seasoning will weigh upon asset quality indicators of the SFBs in FY2025. Elevated risk of the stress spillover to other asset classes would keep asset quality volatile. Gross bad loans shall increase to 2.6-2.8 per cent by end of March 2025 while the Return on assets (RoA) is projected to decline to 1.4-1.6 per cent in FY2025 and marginally improve to 1.6-1.8% in FY2026.

“ICRA expects profitability for the SFBs to remain under pressure in H2 FY2025 as these entities would need to provide/write off delinquent loans to keep the reported GNPA/NNPA under the threshold levels required for universal bank licence application. Accordingly, ICRA estimates the RoA of the industry to decline to 1.4-1.6% in FY2025 and improve marginally in FY2026 to 1.6-1.8% vis-a-vis 2.1% reported in FY2024,” Manushree Saggar, Senior Vice President & Sector Head Financial Sector Ratings, ICRA said.